Why it’s time for a dose of honesty around ESG and how it will be discussed and framed.
As businesses of all sizes are once again reconsidering budgets in the light of tougher trading conditions and general uncertainty as to the future, there is a risk that boards and leaders will decide that there are more important things to invest in than an ESG program.
This is forcing a moment of honesty within organizations as programs previously classified under the banner of ESG are being reassessed for what they are: strategies for operational efficiency.
The situation reminds me a great deal of previous attempts to position social media platforms as potential tools for the enterprise. There was great skepticism and reluctance to embrace ‘Twitter-style messaging platforms’, especially amongst those industries with a strong history of manual processes that had faced enough of a challenge moving to computers in the first place. But once that discussion discarded the marketing speak and referred to the technology as simply ‘workflow tools’, the tone shifted and customers began to understand the potential benefits.
By removing the shiny wrapper, suppliers, be they vendors or integration partners, were able to get at what really matters – the changes and improvements that the client can expect to realize.
Reframing ESG
The same is happening with ESG. By going beyond the hype and the greenwashing, an organization can reassess the changes that it might need to embrace. This review is through the more traditional lens of ‘if there is money to be saved, then investment will be made’, but it will be the same programs that are then embraced by business leadership.
This is not just a case of repackaging these programs – it is, rather, an important shift in emphasis. Rather than focusing on expectations of altruism and being led by external perception, the business can begin to undertake a program that looks at improving efficiency across the board, which all carry a substantial ESG dividend. In short, the dog wags the tail again.
There are, of course, many facets to this operational efficiency.
One of the most pressing for businesses is a reduction in energy use. This has an immediate impact on the bottom line and the strategies and technologies used in an energy reduction program are well established. And ‘energy’ itself is a nebulous term; it can cover electricity and gas at use in buildings or fuel in vehicles.
Until we get honest that ESG is a by-product, then these programs will remain at risk.
Identifying different use patterns and collating data through sensors or even just analyzing energy expenditure and feeding it into asset management software quickly guides decisions in the organization that yield tangible changes. And it is important to note that we are looking at changes here, not just reductions. The same amount of fuel (or electricity or gas) being used that yields a greater return is just as important as cutting the total amount used. Or even a consideration of what type of fuel is used for a given facility (say, ‘green electricity’ over natural gas), and what that shift might mean long term.
This kind of nuance is often missed in ESG programs that simply champion a short-term reduction of energy use. While that is a truly laudable aim, it does sometimes clash with the practicalities of business.
Another low hanging fruit is wastage. In various industries, the allowances and tolerances for wastage are still too high, be it damaged raw materials, finished goods or anything in between. Again, the first step in identifying these areas is often sobering for businesses and there can be a fast initial return to qualify the investment in warehouse and stock management controls as oversupply is corrected, and money lost to wastage is reduced. This is then followed by a reduced demand for warehousing space (and the associated costs) and leaner processes.
Elsewhere, monitoring paper and packaging with a view to reducing their use, or eliminating it, has long been an elusive goal for businesses. The automation of processes is far more likely to help reduce paper than previously. Likewise, being able to move goods through a production or storage environment quicker can cut packaging needs
There are of course, also examples that will apply or yield greater results for specific industries – fuel in logistics, raw materials in manufacturing etc. The point is that lean comes before green in all these instances. Until we make it clear that operational efficiency is a path to profit and get honest about the fact that ESG is a by-product, albeit a fantastic and worthy one, then these programs will remain at risk.
Introducing customer demands and data
The gold standard in protecting these programs and ensuring their relevance to a business is to correlate to customer demands. By producing only what is already sold or has been demanded, in the most efficient manner, a business not only removes waste but also ensures all resources are in the service of both profit and sustainability. This model is also as equally applicable to HR as it is production.
However, this does require sophisticated and comprehensive data drawn from an array of sources spanning customer demands, production processes, the status of warehouses, logistics and supply chains, staffing capabilities and more. And the burden placed on analyzing this data to create workable strategies is substantial.
There are a pair of guiding principles that need to be employed. Firstly, data needs to be gathered from all sources, which necessitates not only the technology to collate and manage that information, but also the processes to make sure that the technology is used correctly.
Secondly, there needs to be assurances that the data collected is the ‘right’ data to inform both operational efficiency and ESG. This qualification may change – no organization can afford to rest on contemporary data. It must also have one eye on what is emergent as valuable, or what can be discovered and made available with new operations and tools.
The context for this moment of honesty is unprecedented. Businesses are facing impacts such as Brexit, the post-COVID market, the supply chain impact of the war in Ukraine, increased fuel prices and the energy crisis. Inflationary pressures and the potential loss of labor are also looming on the horizon.
In the face of this, operational efficiency and the subsequent agility must be top of mind for business leaders. The good news is that during recent years, companies have set about collecting and collating their data for ‘ESG reasons’, and this data is precisely what is needed to make a success of operational efficiency programs. Indeed, it may have been the early dividends of this data, rather than regulatory compliance, which has made ESG such a darling of the boardroom.
Looking to the future, businesses will have to get used to the demands of operational efficiency once again becoming king. Operational savings will be diverted into further investment, but the overriding objective will be efficiency and, once again, doing more with less.
This does not mean that ESG principles will be lost along the way. Far from it, in fact – just because metrics such as perfect order rates, first pass yield, changeover time or throughput do not explicitly state an ESG component, it does not mean that they lack an ESG benefit. But it is time for a dose of honesty around ESG and how it will be discussed and framed.
