In a rapidly changing world, Prof. Stuart Hart and Vipul Arora highlight the urgent need for businesses to go beyond ESG reporting,recognizing the profound impact of climate change and sustainability on the global economy. The article emphasizes the imperative for companies to understand the cause-and-effect relationship between ESG and financial performance, urging leaders to navigate the impending risks and seize opportunities for transformation.

Increasing regulatory pressure is demanding the largest public listed firms to report on their sustainability and ESG performance. 1000 largest listed companies in India need to report. 50,000 companies in Europe or those who do business in EU above 150 Million Euros need to report. The requirements escalate over time along with mandates for assurance.

Additionally, demands from clients, investors, expectations from consumers and competitive peer pressure are pushing reporting further into the supply chain creating a cascading effect that is historic. What took 100 years in the financial reporting world is now expected to be done in ESG in a matter of a few years.

While this has created a significant and onerous reporting burden on companies and their suppliers, it has created a historic opportunity for the consulting and reporting solutions providers. Both parts of the market - clients and providers are busy, trying to meet these deadlines. However, the danger is that in the midst of this ‘busy and justifiable chaos’, it is very easy to miss the real challenge and the real opportunity.

What is the real challenge? We are entering into an ocean of icebergs ahead. Any global indicators we look at, show us that there are significant risks ahead. In a Volatile, Uncertain, Complex and Ambiguous (VUCA) world already grappling with two wars, supply chain disruptions and resulting stress on suppliers, companies and economies, any risk events are sufficient to tilt the balance of the ship we are steering.

Whatever growth we have been generating has been the result of the inherently unsustainable and resource intensive economic engine that has delivered rapid industrialization in the previous 300 years. This engine is soon going to run out of steam.

The brake on growth takes the form of accumulated human generated GHG emissions leading to rapid climate change, loss of biodiversity,increasing income disparity and several other hidden risks that are yet to manifest fully. This is not new information, it was forecast in 1972, in this study: ‘Limits to Growth’. This study already established that the world does not have unlimited resources to feed its perpetual growth forever. There are natural limits.

As these limits are reached in the near future, there will be disruptions in business as usual. Businesses will be impacted by the shortage of resources, driving up raw material costs. As prices of what ‘used to be free’ natural resources are getting priced in, like water, clean air or rather absence of it, businesses are realizing the true cost of doing business. Greenhouse gas emissions are taking us beyond the planetary boundaries of natural systems, threatening to destabilize the very life support systems that sustain us all.

Most decision makers are accustomed to working within budgetary boundaries in the balance sheet and P&L. However, we simply don’t look at natural resources and human capital from the lens of a budget. Nor do we look at our relationships with key stakeholders as a budget with a limit of how much trust we have currently, how much of it we need for future initiatives, and how it can be built further through truthful and transparent reporting and disclosure.

Simply put, we do not treat ESG factors as seriously as we treat financial factors. In the rush of reporting deadlines in the background, there is an even greater danger of treating ESG numbers as just another “tick of the box” item.

The reality is that we need to go Beyond Reporting and even Beyond Compliance. We need to appreciate that ESG numbers have a powerful impact on the business. We need to understand their cause-and-effect relationship with financial numbers. Only when we have understood this cause-and-effect relationship between ESG and financial numbers, will we be able to see the levers of risk reduction and value creation.

Companies, executives and boards that recognize this cause-and-effect relationship will be able to see the future and prepare for it. They will be ready for the risks emerging in 5-10-15 years. Those who ignore this relationship will keep reporting on ESG but never leverage the real power of ESG as a risk reduction and value creation framework.

Climate Change and ESG-led disruption is going to transform the global economy and entire countries. Industries and companies will either transform or disappear. Those who remain part of the problem are at risk. Those who become part of the solution will grow and capture the opportunity. Developing climate change solutions itself represents $40 Trillion of new revenue opportunity. And this is just the tip of the proverbial iceberg.