I’ve been in and around this area of business for over a decade. So yes, I should say this is great.

But I also know through my clients, networks, and from professional bodies and organisations that I am affiliated with, that many ESG initiatives, strategies, and plans are no more than that when you lift the bonnet up. They are not rooted in the business, they sit “outside” of business- as-usual operations and they are generally regarded as a nice to have; “we should probably (be seen to) be doing something on climate/diversity”.

I actually don’t mind a bit of green washing if it leads to some action where there was none before (so long as we don’t then say that this is adequate). But if your business and crucially if the senior leadership team isn’t fully behind these initiatives, then it’s almost certain that the effort put in won’t yield the impact delivered at the end. When this happens, plans are shelved, initiatives are canned, a sour taste is left in the mouth and everyone is worse off in the end.

This post will break down why ESG is so much more than an external initiative to “do a good thing” and why it should be part of your business strategy, your organisation’s governance, your leadership culture and the way you identify and manage real strategic risks and opportunities for your business.

Risks vs opportunities

Risk and opportunities are two sides of the same coin. An unaddressed risk that becomes a live business issue almost always costs more money to resolve once the risk has materialised, compared to the cost of any of the mitigating measures you might have spent money on to prevent the risk from occurring in the first place or to minimise the cost of damage once it has happened.

Don’t believe me? How much money would it have cost to General Motors to bolster its existing activity in the electric vehicle space (pre-dating Tesla) compared to the loss it made when it finally went cap in hand to the US Government for a bailout?

A business opportunity that isn’t capitalised on because the business didn’t see it coming, or wasn’t prepared to take action will cost more in terms of loss of market share and direct sales than the so-called “cost” of time, energy and money spent on horizon scanning and innovation.

Still not convinced? Consider what happened to Blockbuster, Xerox and Kodak when they failed to keep abreast of emerging technology and trends.

Moral vs business priorities

I hear often how some businesses treat ESG as “just another initiative” that takes away valuable time and resources from genuine business priorities.

Resources might be committed when the sun is shining, but resources will quickly be re-allocated when economic clouds darken the skies.

In other words, ESG initiatives are treated as an “external” risk or opportunity. And this is when these initiatives are likely (if not certain) to fail.

And by the way, yes of course ESG initiatives are absolutely the “right thing to do” from a moral standpoint but I am a business person and a pragmatist and we operate in a business world. We need to treat and evaluate ESG initiatives based on business impact, not just environmental, social and governance, for ESG to be really impactful.

Business objectives and ESG objectives don’t need to be mutually exclusive. I’ve witnessed many businesses making a profit “for a purpose” achieve far more than a charity could operating in the same sector and with the same mission. Business doesn’t have to equal a dirty word.

But we do need to consider moral issues from a business perspective if we want to drive meaningful change through businesses.

External vs internal risks and opportunities

What do I mean by external vs internal?

The external opportunity is the benefit gained from breaking into new markets or attracting new customers from signalling a commitment to ESG. The opposite external downside risk would be not benefiting from undertaking that activity.

And this is where it gets interesting. Because the downside risk in this case isn’t a genuine business risk when viewed in this way, it is simply a no change for BAU by not doing it.

But from an internal business perspective, ESG is an internal activity as much as an externally facing one. There is no business that is not at some risk from environmental, social or governance issues.

This is the fundamental mistake that businesses make when assessing the viability of ESG initiatives based on reputation or external positioning alone.

The true risks to your business

There are plenty of articles that set out the benefits of ESG – a few of them include:

• British Business Bank: for smaller businesses
• TechTarget: for business investment
• MHA: audit, tax, and advisory

So here, I highlight some of the internal business risks that exist by not undertaking ESG initiatives.

Depending on the nature of your business, some of these risks may not apply in the same way. Risks (and some of these are also live issues) include:

• Rising energy prices due to climate issues or war
• Increasing insurance premiums due to increased flood claims
•  Increased transport costs due to higher taxes if you haven’t switched or higher purchase prices for new tech EVs
• Supply chain price volatility
• Supply chain risk from climate disasters and other global market shocks
• A lack of staff diversity reflective of customers
• Executive “Group-think” misses key business risk and innovations by failing to engage and consult with different perspectives and experiences
• Inequitable treatment of different customers groups
• A bad hire that upsets a key customer
• A leader of the business taking a decision that is not in line with company policy or priorities that has a negative consequence
• A compliance or regulatory issue occurs due to a lack of management oversight.

How a business lens can yield better moral outcomes

To use the terms deployed in McKinsey’s report, let’s look at a defensive perspective and an offences perspective.

Defending your current position

If your business has been around for a while and business has been pretty steady and so far unaffected by external shocks, you might be more at risk that you think. The world is constantly changing and with that comes new ways of doing things and different expectations from customers. What might have been exemplary in terms of a product or service yesterday may become subpar tomorrow just because external factors have shifted and peoples’ expectations have evolved.

If you haven’t been gazing out to the horizon and actively assessing these external changes, you could find yourself suddenly losing business.

Doing nothing is not a business strategy.

Let me take one of my favourite organisational problems to tackle: Operational efficiency and effectiveness.

As a recovering specialist in operational effectiveness, it is no wonder that one of the most common challenges that businesses I work with are affected by, is inefficient operations. Most businesses I come into contact with don’t set out to be inefficient, they arrive at that point over a number of years because they don’t have knowledge and awareness about other ways of doing things which get better results. If a business doesn’t build in periodic opportunities to step back and review the business objectively, then its operating model can become unsustainable in a shifting external environment.

Happily, there are some wonderful examples in my local area where businesses have delivered more sustainable ways of working just to become more efficient and more commercially viable.

Does it matter that the driver was to reduce costs or boost profit if the end result is better for the environment?

Of course not!

Opportunities offence

I mentioned the risk of losing customers by failing to understanding their expectations. But what about opportunities to attract new customers?

Some of you might have heard of one such example publicised in the 2023 film “Flamin’ Hot” about the janitor Richard Montañez who was involved in developing snacks for the company Frito-Lays for the Latino market.

How much business might your business be missing by only focusing on one customer type?

With this perspective, you can take a more representative approach to your customers that generates material benefits to your business, with the moral position of inclusivity also being achieved.

When we do good business well, everyone benefits.

How do you manage risk?

Most businesses I work with don’t have any kind of structured risk management process in place.

Risk management doesn't need to be a laboured, bureaucratic and dry process. You also don’t need a risk management specialist to help. It’s simply about asking the right questions.

So here are some I used with a client just last week:

• What are the things you are fearful of or worry about, related to your business?
• Taking one of those responses from above as an example, what is the worst-case scenario related to that worry?
• What would be the consequence and the associated impact were that worst-case scenario to occur? (e.g.: on business income, costs, people, reputation etc.)
• Has that worst-case scenario happened before? How likely is it to occur (again)?
• Should the worst case scenario occur, how would you cope? What would you do and what support or resources do you have in place to assist you? (When we are able to visualise stepping through the fear in the worst case scenario we are likely to stop fearing the consequence).
• Is there anything else that is relevant to consider in relation to this risk?

For more startup news, check out the other articles on the website, and subscribe to the magazine for free. Listen to The Cereal Entrepreneur podcast for more interviews with entrepreneurs and big-hitters in the startup ecosystem.