ESG is not a destination, but a pathway to a sustainable future 

Sustainability is headline news, but how do organisations integrate environmental, social and governance (ESG) factors into their business decisions?

ESG is considered extremely or very important by 87% of senior leadership and 74% of senior management, according to Mercer’s 2021 ESG Leadership Survey of 106 European organisations. CEOs are increasingly examining internal procedures while asset owners are demanding better visibility of the underlying companies they invest in and engaging more in stewardship.

The prospect of organisational transformation to achieve sustainability goals can be daunting. Change can, however, be implemented in steps and tangible impacts can be realized. The following are three key levers for progressing corporate sustainability performance.

Sustainable investment is about taking a broader and longer-term perspective on risk. It involves accepting that climate change, in particular, poses a systemic risk and wider ESG factors can be financially material if not managed effectively.

Asset owners want to decide their sustainability priorities and align stakeholders, from the sponsor to the beneficiaries, so they can focus on how to implement their investment decisions. Our global Sustainable Investment team has been a market leader for over a decade, working with all types of asset owners to build and leverage the possibilities of sustainable portfolios. And, to help provide clients with reliable options, Mercer’s discretionary funds in the UK, Europe and Asia Pacific have been set on a path to have net-zero absolute carbon emissions by 2050.

The focus of any long-term sustainability target should be on setting interim milestones and monitoring progress. This requires asset owner stewardship, to ensure there is ongoing engagement with the investee companies, and ensuring ownership rights are exercised. Staying proactive and engaging helps to make change happen.

Assigning sustainability goals only to executives and only for the shorter term is unlikely to enable organisations to achieve lasting change. Broader accountability that cascades into the organisation is required to achieve real progress.

Our recent leadership survey found 40% of organisations link short-term incentives to ESG goals and a further 11% are in the process of implementation. Far fewer, 24%, do likewise for long-term incentives, with only a further 2% implementing. Improving sustainability involves aligning ESG ambitions and financial targets while incentivising leaders and other employees to meet sustainability goals. Of the organisations that link incentives to ESG, our leadership survey found 48% link to diversity, equality and inclusion (DE&I), 41% to C02 emissions, 39% to health and safety, 37% to customer satisfaction and 34% to environmental sustainability.

Joint Mercer and the Reward & Employee Benefits Association (REBA) research, Transforming Engagement, uncovered a gap between board-level ambition and employee reality. While ESG and sustainable business is a priority for 58% of those at board level, it was a priority for just 21% of line managers. To a lesser extent, the same was true of DE&I, at 78% and 50% respectively.

Most companies are still developing effective processes for managing sustainability performance. Employees are critical to the mission for two main reasons: organisations are unlikely to achieve sustainability goals unless employees are clear about the priorities and how to achieve them; and employees find their careers more rewarding when they know how they make a difference.

Mercer developed its sustainability methodology to help organisations develop their transformation strategy. This includes transformation audits and organisation design, advice on executive targeting and remuneration, and consulting on organisational change and employee engagement.

Employees are a key stakeholder group. To create enduring success, a company needs to align its people priorities with its actions and desired outcomes. Currently, companies often emphasise wellbeing and DE&I as signature policies. Increasingly, flexibility and parental support are gaining prominence.  Continued relevant and successful engagement with employees will demand continuously developing fresh perspectives and establishing best practices as the employment landscape evolves and changes. Progressive and responsive employee practices are increasingly being brought under the banner of sustainability.

Mercer’s responsible employment solutions are designed to enable an organisation to develop an employment proposition which incorporates their sustainability goals. These include wage practices, including global living wage analysis; global benefit practices, including health protections and opportunities to save; job and career design to enable all the opportunity of curated progression; and workplace facilities, including a variety of flexibilities. And, importantly, access to meaningful work and the opportunity to make a difference to society through social impact programmes.

Mercer sees greatest value produced by holistic and integrated strategies. Stakeholders all around the world are rapidly raising their expectations, so ESG policies need to be strategic and deliverable. Only formal plans and robust execution will make a difference.