Towards sustainability: Navigating the maze

A major driver of change is the socially and environmentally conscious consumer whose buying choices are increasingly influenced by a wide range of ESG concerns that include, but are not limited to: animal testing; use of harmful chemicals in food production; and exploitative forms of labour. Such customers are moving away from brands that are not taking action on sustainability and are willing to pay a premium for brands associated with leading sustainability practices. Perhaps the most well-known example in this regard is organic food. A similar trend is observed with key talent whose criteria for choosing an employer goes beyond the traditional pay and title to include the value system and corporate reputation of the prospective employer.

To survive this emerging trend and thrive, companies need to understand the trend and how it impacts their own value chains, including their customers and suppliers. Whilst evidence of the trends is scanty in Uganda, many Ugandan businesses produce goods that are sold in foreign markets where these consumer trends are taking root. To retain such business in the long-term and to achieve better prices in the short-term, these companies need to not only embrace sustainable practices but also readily demonstrate how they do so as and when called upon.

The second major driver or force behind the adoption of sustainability is investors who have found their voice and are using their power and influence to drive corporate action. A leading example is Larry Fink, the chief executive officer of Blackrock who has focused his annual letters to CEOs of investee companies on sustainable practices. His 2020 letter announced plans to increasingly vote against “management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”

In addition, assets under management for investors signed up to the Principles for Responsible Investing rose by 17% in 2021 to US$ 121 trillion. This means companies looking for capital will increasingly be required to demonstrate effective sustainable practices - on paper and in action.

Thirdly, research shows that companies with effective sustainable practices have superior results across various performance measures including the growth of revenue, margin, and share price. They also enjoy better and cheaper access to capital and superior community relations - indicating a positive correlation between sustainable practices and management of risk.

We now understand much better the call to adoption of sustainability practices at the corporate level. It is no longer a matter of doing well when we feel like it or when it is convenient. It is a matter of doing right by all our stakeholders at all times. Doing nothing is no longer a viable option as evidence points to a shift in what it will take to succeed in future not only in attracting funding, talent, and customers of the future but more importantly, in the design of products and services and in the reimagination of their production processes, sourcing, and distribution. As Larry Fink says in his 2022 letter to CEOs,  “decarbonising of the global economy is going to create the greatest investment opportunity of our lifetime. It will also leave behind the companies that don’t adapt, regardless of what industry they are in. Just as some companies risk being left behind, so do cities and countries that don’t plan for the future.”

This is a radical change in the ways that we look at businesses starting with purpose, which has traditionally been seen as maximising the wealth of owners to now include wider goals for society and the environment. Another example is the way we look at risks which has broadened from those associated with the assets and liabilities reported on balance sheets to include wider economic, societal, and environmental risks which pose arguably more serious threats to those businesses as they can render existing assets of little or no value in the long-term if the wider risks are not addressed. Ignoring ESG also implies that enterprises may be very late in becoming aware of risks and liabilities posed directly and/ or indirectly by their activities.

We also understand better how to measure with the development of ESG metrics that have gained acceptance in different industries. Finally, the emergence of new sustainability reporting standards promises consistent frameworks for reporting on progress made in sustainability. As the saying goes: what’s not measured does not get done. With all those enabling factors in place, it is safe to say that sustainability has finally found its place in the business world. Adoption should not be led only by compliance as we have seen that it makes good business sense to invest in sustainable practices.

The writer is the country senior partner at PwC Uganda.