Ignore doing anything on ESG, and businesses are placing themselves in harm’s way. Image Credit: Shutterstock

Businesses and governments are recognising that ESG risks and opportunities are fundamental to guarantee the long-term success of companies. Alongside the attraction of talent, the operating model, and their investors’ interests.

As such, ESG principles have become a core element to every company’s operations and supply chain, moving from a ‘nice to have’ to a crucial element of business strategy.

In this environment, the levels of scrutiny on environmental credentials businesses face will only increase. Demonstrating tangible ESG policies as well as a solid strategy to offer more sustainable products and services has become paramount.

Businesses that neglect or do not put the right strategies in place to improve their environmental impact – including Scope 3 emissions and the environmental footprint across their supply chain - risk damaging their reputation, face greenwashing claims and losing market share. A business’s ESG performance can also impact stock prices, business valuations, and investor appetite, in turn affecting a company’s growth and funding opportunities.

When the stakes are this high, integrating ESG into business operations becomes an absolute priority. If done successfully, this can become a competitive advantage and lead to increased efficiency, reduced costs and environmental impact, whilst enabling the creation and delivery of products and services that are more attractive to business partners and end consumers.

Regulation and digitisation

An increasing number of jurisdictions, including the UAE, are passing regulations requiring businesses to adopt and report on ESG metrics, with some markets – such as the EU - also introducing tariffs for non-compliant companies and products. While new regulatory disclosure rules are pushing companies - including financial services firms - to move their ESG activities under the oversight of risk and compliance teams, embracing regulation can be turned into a competitive advantage if businesses do so proactively.

Here’s an easy way to be ESG-compliant – take on projects that are closely linked to the company’s wider purpose. Image Credit: Shutterstock

Similarly, the digital transformation and the digitisation of processes are enabling better reporting, efficiency gains, and data capture and analysis. Latest generation digital technologies such as the cloud, AI and Machine Learning (ML), can make enormous inroads in optimising energy consumption and supply chain efficiencies.

The key is to achieve the right application of digital technologies in the right places and in a coordinated way across the supply chain.

The consultancy EY estimates that supply chains account for 50-70 per cent of a business’s operating costs and more than 90 per cent of their greenhouse gas emissions. The key to sustaining profits and revenue growth, while contributing to the protection of the environment and observing social and governance issues, is to identify projects and initiatives that are linked to the company’s purpose, are sustainable over time, and can deliver financial returns while serving the environment and the community.

Role of the financial sector

A study by McKinsey concludes that companies that pay attention to ESG concerns do not have a negative impact on value creation but rather the opposite. This indicates that a strong ESG proposition correlates with higher equity returns, both from an inflection and momentum perspective.

A better ESG performance is also associated with a reduction in downside risk, as evidenced by lower loan and credit default swap spreads and higher credit ratings, among other factors.

ESG is related to cashflow in these ways:

• It minimises regulatory and legal intervention;

• Increases employee productivity;

• Optimises investment and capital expenditures;

• Facilitates top-line growth by attracting customers through sustainable products and services; and

• Reduces costs by, for example, lowering energy consumption.

In this context, sustainable procurement practices must be considered and implemented to balance profit and purpose across complex supply chains and maximise the benefits of enforcing ESG standards across all stakeholders involved in the procurement process.

These standards provide guidance to organisations on taking an ethical and holistic approach to ensure that fair contract prices and terms are applied, and that human rights and employment standards are met. Companies are using these standards to design and implement their sustainable procurement practices and supply chain ESG strategies successfully.

Crucially, sustainable procurement standards can be reinforced by implementing financing programs that encourage the right ESG behaviours by suppliers. Banks can structure supplier finance programs that are linked to specific ESG outcomes that a business wishes to achieve under their ESG framework and sustainable procurement targets.

Since January 2021, Mashreq has facilitated $15.5 billion of sustainable finance and adaptation-related investments.

The financial sector has an important commitment to make in supporting ESG adoption across the supply chain by developing financial solutions that help businesses achieve their ESG objectives. Green bonds are an excellent example of this, but it can also be extended to ESG-linked supply chain finance programs that reward suppliers who meet specified targets with a lower cost of working capital.

In harnessing the opportunity to finance innovations that will drive efficiency and save costs for all players in the ecosystem, banks can claim their role in accelerating ESG integration across the supply chain.

In essence, ESG goals must be aligned with the corporate values of a company and empower the business to act as a force for good, reinforcing its position and impact within the community and engaging with said community on an emotional level that goes beyond operations and performance.