Steps that Family Businesses can take on ESG
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Many family businesses have spent decades earning trust among their stakeholders. Some have even spent centuries doing so. But in 2021, trust is a precious and increasingly rare commodity. If Australian family businesses fail to comprehensively focus on environmental, social and governance (ESG) issues and opportunities, they could undo years of good work, lose stakeholder trust, and erode value.
PwC’s 10th Family Business Survey revealed that sustainability is a low priority for Australian family businesses, with only a third (33%) of Australian family businesses putting sustainability at the heart of what they do, compared with almost half (49%) of family businesses globally. Similarly, only 36% of family businesses here believe there’s an opportunity to lead the way in sustainable business practices (compared to 55% globally).
At the same time, consumer expectations around ESG factors are rising. Even before the COVID-19 pandemic, 43% of consumers expected businesses to be accountable for their environmental impact, and this sentiment is now more acute than ever. Similarly, private equity – a key funder and buyer of family and private businesses – is prioritising investment in businesses with ESG credentials.
It’s a mistake for family businesses to consider ESG as being a cost. When managed well, ESG is a chance to differentiate, to discover new opportunities, and to deliver impact for stakeholders. It can also unearth cost savings.
At PwC, we know that it’s imperative for Australian family businesses to demonstrate their ESG credentials and preserve stakeholder trust. So Martina Crowley, our Private Clients Business Leader, sat down with Liza Maimone, our COO and ESG Leader, to discuss how ESG can take family businesses to new heights.
Martina Crowley: Firstly Liza, I think that there can be confusion and a lack of understanding around what ESG is. Can you clear this up for us?
Liza Maimone: ESG has been known by many different names: sustainability risks and opportunities; purpose-led reporting; corporate social responsibility; etc.
Essentially, environmental, social and governance factors are core to an organisation’s strategy and operations. These factors cover various risks and opportunities that impact an organisation’s ability to protect and create long-term value. They are defined as the ESG factors that matter most to an organisation when it considers the views and interests of its key stakeholders, whether they be customers, staff, regulators or investors
Environmental factors can include: carbon and climate change vulnerabilities; water, waste and pollution management; renewable energy and clean technology;
Social factors, for instance, encompass your relationship with your community and your reputation. In practical terms? It means complying with employment legislation, labour standards (including diversity and inclusion), consideration of the rights of First Nations peoples on their lands, and more. It also means having oversight of your supply chain. And it means consumer protections.
Effective governance, meanwhile, covers having internal controls and procedures in place around tax strategy, risk management, remuneration and more. It also covers compliance with a raft of legislation and regulations existing and emerging.
Martina Crowley: From our recent survey, we know 57% of family businesses regularly contribute to their community and 44% are involved in philanthropy. That suggests family businesses are quite well versed on the ‘S’ in ESG. So what’s missing?
Liza Maimone: Philanthropy and giving back to the community are important pieces of the ESG puzzle, but businesses also need a strategy around material risks and ESG opportunities. It’s no longer enough to consider ESG reporting a nice-to-have; it should be core to your business and it should provide an account of the organisation’s performance on material ESG topics - against goals and targets.
So, yes, Australian family businesses have done remarkably well with philanthropy but if they don’t get their broader sustainability proposition right then they’re missing valuable opportunities and potentially eroding value.
Martina Crowley: Let’s break this down. Only 41% of surveyed family businesses, for example, believe they have a responsibility to fight climate change. What exactly should an ESG strategy look like for family businesses?
Liza Maimone: Great question. It’s not necessarily about climate change, such as achieving net zero emissions, although that might be one goal. As the acronym suggests, an ESG strategy should address environmental concerns, but also social and governance factors, too.
So absolutely, ESG involves environmental considerations but there’s more to it than that. For family businesses, effective ESG management is all about listening to stakeholders when they tell you what they expect. And what consumers expect, more than ever, is for profit to be aligned with purpose.
Martina Crowley: You could argue that family businesses are perfectly placed to respond to customer expectations because they are privately owned and family operated.
Liza Maimone: Right. They’re nimble. And when you think about it, most family businesses have a purpose that goes beyond profit generation. Many have deep family and social ties to their communities that span decades or even generations. Social responsibility is part of their DNA. That’s a strong foundation from which to build a formal ESG strategy and a great point of differentiation.
Martina Crowley: And yet PwC’s study found that only 28% of Australian family businesses have developed and communicated a sustainability strategy. Why do you think that is?
Liza Maimone: I’ll give you one hypothesis. Listed companies face huge pressure around sustainability from investors and activists – two groups of stakeholders that family businesses don’t generally have to answer to. Instead, family businesses are more likely to face consumer pressures and employee expectations.
Only, now these are increasing too.
Suddenly, the more pressing question for family businesses is: How can you get ahead of the curve and satisfy consumers and employees when it comes to sustainability?
Martina Crowley: And for some, there’s the chance to be early adopters with a sustainable strategy.
Liza Maimone: Exactly. This is a huge opportunity for your business to get a first-mover advantage.
Martina Crowley: What about the costs involved?
Liza Maimone: There is a view that ESG equals cost but having a sustainability focus should actually reduce your costs. Think about climate change. If you’re reducing your carbon footprint, then you’re necessarily more energy efficient so you’re saving money – money that can be reinvested in growth.
At the same time, a strong ESG proposition can lead to value creation. Say you’re a supplier who can demonstrate your environmental sustainability strategy. When a large company refreshes their supply chain in line with their commitment to net-zero emissions, then you’re in pole position to pick up that contract. PwC is going through this process right now, and we’re choosing to work with suppliers who share our ESG priorities.
Martina Crowley: So having a strong ESG proposition makes financial sense?
Liza Maimone: It does. Our data shows that integrating a strong ESG agenda into the corporate strategy of family businesses promotes business resilience, talent retention and long-term value creation in deals, divestment and growth. It improves access to finance. It enriches the family brand and reputation.
Above all though, it enables family businesses to meet stakeholder expectations.
Martina Crowley: And these expectations are on the rise?
Liza Maimone: A disruption the size of the COVID-19 pandemic means there are more ESG risks at play, as well as heightened community awareness around those risks. At the same time, of course, there are greater opportunities for family businesses to apply an ESG lens to their strategy and create some value.
Martina Crowley: How, then, can family businesses create a strong ESG proposition?
Liza Maimone: Here are three practical steps any family business can take towards adopting ESG measures.
First, you’ll need a clear understanding of exactly who your stakeholders are and what issues are important to them.
Second, you’ll need to align your strategy with these material issues and develop an ESG roadmap in response.
Third, it’s important to set ESG targets and to report continuously and transparently on those targets, as well as think about your approach to reward taking into account these targets (in a corporate, we would recommend linking exec rem/reward to ESG targets)
After all, your stakeholders are placing their trust in you. This is your chance to justify that and make your business more resilient in the process.
Embed ESG in your operating model: From lowering the cost of capital to enhancing brand value, the benefits of embedding ESG can be enormous. ESG is no longer a nice-to-have; it should be integral to every decision you make.
Seek help in measuring ESG metrics: There’s no internationally consistent system for reporting ESG metrics. However, in 2020, the World Economic Forum (WEF) published a framework for consistent reporting on ESG in a bid for greater consistency and accountability. At PwC, we are well versed in the WEF framework and how it can add value for businesses.
Communicate clearly and transparently: Your stakeholders want to know about your goals and achievements, so setting and communicating your progress around ESG targets is essential.
Involve younger generations: Fourth-generation businesses are more likely to have a well-developed sustainability strategy and to embed sustainability in decision-making. That’s because younger generations in family businesses are often motivated by ESG issues. If the next generation of your business shows an aptitude and desire to champion ESG, harness this and get them involved.
Promote board diversity: A diverse board can challenge thinking around what sustainability means for your business – including risks, potential upsides and opportunities.
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