Building a resilient business is increasingly dependent on preparing for the impact of non-financial factors, including those related to environmental, social and governance (ESG) issues. As we see with the current business impacts of COVID-19, companies are already dealing with financially material business factors that can develop suddenly. To succeed in the coming decade, investors and companies must equip themselves with forward-looking and proactive approaches to materiality.
The white paper, Embracing the New Age of Materiality: Harnessing the Pace of Change in ESG, determines that what is financially immaterial to a company or industry today can become material tomorrow, a process called “dynamic materiality”. The whitepaper also introduces a new framework analyses how ESG issues have become financially material over time.
ESG issues are increasingly impacting business. As social tensions and similar trends become more acute, these external social and environmental factors will become tangible financial costs for companies.
“As we’re learning in real-time with the outbreak of COVID-19 and its unexpected impacts, today’s companies must increasingly account for non-financial factors in their long- and short-term business plans,” said Maha Eltobgy, Head of the Future of Investing at the World Economic Forum. “As companies look to adapt their value‑creation plans in the new business landscape, they must optimize performance against current and future material ESG issues to safeguard their companies and ensure long-term success.”
While companies are already feeling the impact of ESG factors on the health of their business, today’s era of increased transparency is also highlighting the importance of enhanced disclosures. Increased transparency also means that the rate at which currently immaterial issues are becoming material is accelerating.
“For businesses to thrive in the 2020s, they will need to understand the forces that will shape the next 10 years and use them to their advantage. There’s no doubt that sustainability and societal impact issues will be a leading force for driving value creation,” said Rich Lesser, Global Chief Executive Officer, BCG, USA.
The framework, developed by the World Economic Forum in collaboration with Boston Consulting Group (BCG), helps companies identify these issues. It comprises four components:
- Hyper-transparency of corporate practices in the Fourth Industrial Revolution
- Escalating stakeholder activism fuelled by social media
- Changing societal expectation in the new age of stakeholder activism
- Growing investor focus on sustainability issues
The framework for action gives guidance to investors on the signals to look for to better identify and manage dynamic ESG issues.
The coming generations are already creating changes in consumer markets, talent pools and other areas of society as their economic importance grows. Companies must acknowledge the upcoming generations priorities. They need to reflect and internalize these values in their operations and investment.