The environment in which the resources sector operates is rapidly changing when it comes to environmental, social and governance (ESG) issues. What was a ‘nice-to-have’ as recently as a year ago has rapidly become a ‘must-have’. This is driven in part by external expectations: investors are increasingly taking firm and active positions on these issues; customers have a greater interest in tracing their supply chain; and communities and the media are more alert and assertive. However, internal drivers are also important. Leaders are embracing the positive impact that business can have on shaping the societies, environments, and economies in which they operate; and staff are aligning and engaging with initiatives that can make a difference.
With these increasing expectations, credibility on ESG is now essential for success in a diverse set of playing fields. Further, the nature of conversations is changing. Across the competitions for customers, investors, employees, and approvals, issues that were previously siloed in stakeholders’ minds — such as diversity and carbon emissions — are merging into a single conversation on sustainability and positive impact. Companies who can present a compelling, credible perspective that unites these issues have a distinct competitive advantage.
Moving corporate ESG to front and center
Real credibility increasingly requires stronger foundations. Whereas ‘compliance’ may once have been sufficient, now organizations without a holistic sustainability report are being left behind, and even this will be insufficient without an ability to tangibly explain to stakeholders what ESG outcomes will be delivered, and the mechanisms and roadmap to deliver those targets. The practical effect is that organizations are balancing pressure (and genuine desire) to commit to increased public targets and disclosure with the risk of reputational damage if announcements are seen as cynical. There is a race to generate robust plans not only to accelerate results, but to support credible public commitments on an increasing range of topics.
We think of strategy as a series of decisions that need to be made coherently and cascaded into a robust plan. What is our ambition? What world are we planning for? Where will we play and how will we win in those markets? How will we align targets, accountability, capabilities, and investment to deliver?
The scope of these traditional corporate strategy questions is being broadened (Exhibit 1). ESG considerations need to be part of the strategic conversation throughout, as the answer is not ‘one- size-fits-all’ – organizations need to think through their specific context to inform these decisions and solve them in a coherent way.
Exhibit 1: Leading organizations are “hard wiring” a nuanced approach to ESG their strategic ambition
Source: Oliver Wyman analysis
Delivering on a coherent strategy
Organizing teams and prioritizing resources to deliver the strategy also looks different with ESG as a cross-cutting theme. Each of the organizations we work with has been grappling with how to build credibility, manage risks, and drive results. Delivering the strategy requires leading integrated discussions with investors, customers, and governments; setting and delivering targets; and driving cultural and operational change.
This means — amongst other things — revisiting studies and mine plans, reviewing capital plans, refocusing innovation priorities, reprioritizing corporate development, reframing investor messaging, deepening understanding of customer requirements and community expectations, and setting supplier requirements. It is a whole-of-enterprise endeavour.
Embedding ESG considerations in the execution of strategy is more likely to be successful if organizations actively address three considerations:
Accountability and capability. Organizations need to thoughtfully organize and resource ESG accountabilities and capabilities as part of the core business, not in compliance-focused silos.
Setting and cascading targets. Mobilizing the organization requires stretch targets, built in partnership with the operating teams who will need to deliver them.
Sequencing effort and investments. Balancing the need to invest early in readiness and to steer the impact of long-term investments, with the need to maintain flexibility and agility as technology and markets evolve.
Exhibit 2: What clients want to know about execution challenges
Source: Oliver Wyman analysis
Taking ESG out of the silo
The traditional approach to ESG issues has been one of compliance frameworks. Looking ahead, there is a risk that increasing expectations around climate-related and nature-related financial disclosures will reinforce a siloed and defensive mindset.
Instead, organizations need to embrace ESG as a central part of the strategy process. This means bringing a tailored, integrated view of the issues not only into the typical ‘fact base’ — incorporating a materiality assessment to highlight key risks and opportunities — but also weaving these into assessments of markets, funding options, employee value propositions, and innovation priorities.
This will ensure leading organizations will have a coherent corporate strategy that embeds sustainability in the organization’s ambition, its choice of markets, and how it will compete and win in those markets.