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What Are Some Different Operating Models That Will Emerge After COVID-19?

The rapid acceleration of COVID-19 into a global pandemic that has cost many lives and livelihoods won’t last forever. On the other side of the bridge, firms will either still be in business or have closed their doors permanently. The operating model that made sense pre-COVID will require changes to be competitive in the new normal. This post outlines some potential changes that firms might want to consider.

An operating model is a framework for how a business delivers value to its customers. A trend over the past few decades has been focusing on the core competencies of a business, and outsourcing capabilities to third parties where this is possible so that a firm has a lean operating model and can focus on what it does best and the areas where it adds the most value.

What the COVID-19 pandemic has highlighted is that there are risks from outsourcing and offshoring that require flexibility and quick thinking inside often complex contractual arrangements. For firms that have their locations offshore, the movement restrictions will have reduced the capability of these teams unless investment in people, processes and systems was made well before COVID-19 arrived.

A firm will need to design a new target operating model to reflect the higher risk aversion and control over your value chain that boards will demand from senior executives. ESG risk is more important now, and in the new normal, than it was at Davos earlier in the year.

Institutional investors will expect great improvements in responsible corporate behaviour and efficiency. Employees will expect a strong focus on a safe workplace and measured changes to employment as opposed to indiscriminate cost-cutting. Regulators will expect compliance projects to deliver, even if deferred, and more regulation in many areas is likely to emerge in the new normal.

This scenario paints a picture of an ever more complex operational environment in which to design your new target operating model. For firms that were already struggling with people, processes and systems before COVID-19, this crisis could end them. The uplift in capability required for your *entire* workforce to be able to work remotely for extended periods will be beyond the constrained resources of many firms.

This remote work drive ignores the fact that two-thirds of the economy *can’t* work from home because of the type of work they do – for example, construction or in-person service at a retail store. The higher level of social scrutiny will mean standard responses to crises will face serious social media and political backlash if firms implement them. Already, those who are missing out on help because of the “lines in the sand” drawn by politicians are a major social unrest risk factor.

Because the core focus of the target operating model design is about delivering value to customers, the products and services that a firm offers will be adjusted. If firms are more conservative, risk-averse, and less willing to spend on discretionary items, your product and service offering will need to offer value-for-money and easily plug-in to existing operating models to win new business. The appetite for multi-year or even multi-month implementation projects will not return unless there are clear drop-dead regulatory deadlines.

The top value streams that your firm delivers to customers will need to be enhanced to reflect the new normal. Firms need to remove friction or pain in their customer experience, which implies high-skill people quarterbacking implementations and focusing on automation of processes wherever possible to reduce the overall cost of delivery and run-cost in BAU.

Simplifying the operating model of a business unit wherever possible, will assist in sustainable cost outs. The organisation design workstream of a target operating model design will need to carefully build the right structure that enables value delivery with no excess FTE requirements but sufficient flexibility to respond to ebbs and flows in transaction volume. Firms will need to work with collaboratively with customers and employees to arrive at this new organisation design. An indiscriminate restructuring that doesn’t consider the end-to-end value stream delivered to the customer will result in poor outcomes for the firm.

The role of location and place in how the assembly of value streams occurs will need to change. If more people are working at home, less office space will be required. Thankfully, because of outsourcing and offshoring, many handoffs between different organisations are already managed remotely through email, video chat, collaboration tools, and conference calls. There will need to be an uplift in the tools available if your firm doesn’t have these because getting people to use their cellphone and desk at home without full reimbursement will become untenable in due course.

The onshoring of all elements of the value stream, wherever possible, is a scenario some boards may ask senior executives to plan for. This will involve evaluating the entire value stream to ensure that end-to-end domestic replication is feasible. Firms will review customers and suppliers equally – it may become uneconomic to do business with some customers.

Some suppliers may find themselves cut out of entire markets overseas because of COVID-19 with no foreseeable way back in as the era of globalisation ends. Governments should be aware of the risk to the economy if entire value chains collapse under the strain of changes made by firms unilaterally as a result of this crisis. The end of business travel for the foreseeable future means that large enterprise sales are unlikely to be cemented which further increases the pressure on firms to cut costs and automate as much of their value delivery as is realistic under the constraints they are operating within.

The post-COVID-19 target operating model will be very different from the digital transformation or cross-functional capability TOM that found favour over the past few years. If you thought that the increase in risk and compliance projects stemming from the GFC and higher levels of supra-national regulation, then you are in for a surprise. Expect an enormous focus on risk management in supply chains and increasingly invasive due-diligence from customers.

 For example, if I were advising a firm on due diligence of a potential supplier, a report of how they managed their response to COVID-19 in extreme detail would be a bare minimum expectation. This reporting will increase the timeframe for major supplier changes because firms will have to produce even more collateral and potential customers review it in detail to manage risk appropriately for any changes to components of an operating model.

The different target operating model designs that emerge after this crisis will have simplicity at their core. Wherever a value chain currently hits a border or complex manual handoff, the removal of these frictions will be a core focus of how capabilities combine to deliver value to customers. A higher level of governance, accountability, and assurance around controls and risk mitigants is by higher risk aversion at board-level.  

There is also a higher level of ESG risk sensitivity from stakeholders, particularly asset managers concerns about enormous asset price fluctuations. This sensitivity means that any firm embarking on a target operating model design for the new normal must ensure that a responsible operating model is an outcome. A responsible operating model gives boards assurance that ESG risk reduction is part of the target operating model from the start of the program. It will enable the delivery of the revised strategy for the post-COVID-19 world that is a lot more conservative and cautious than it was even a month ago.

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How Can Firms Restructure Responsibly During COVID-19?

How can firms restructure responsibly? In the COVID-19 era, many boards and senior executives have made enormous decisions about the short-term changes they need to make to their business to stay alive. Many have acted with integrity and considered their entire group of stakeholders, not just shareholders, and done the right thing for their customers and employees. Others have reverted to the crisis playbooks of yesteryear.

Just a few months ago, in January 2020, the rise of ESG investing reached a crescendo at the World Economic Forum in Davos, Switzerland. The global elite spoke lovingly about their sustainability initiatives and measures they were taking to reduce ESG risk inside their firms. Institutional investors, riding high on a decade long asset price rise, were very comfortable with the new direction.

Where are many of these voices now? The environmental, social and governance risks for firms emerging from the response to the COVID-19 health crisis are enormous. Because of the advice around social distancing, use of personal protective equipment, and working from home wherever possible, there are obvious worker health and safety risks. Some firms have responded well, others have acted as if the last 50 years didn’t happen.

The social risks from continuing to insist on retail tenants trading when there is already low foot traffic in shopping malls, for example, will be held to account once this is over. The inability of a firm to hibernate in a competitive and contract-driven world should have been clearer to policymakers. However, the speed of the response has led to grave policy errors that will extend the hurt throughout the economy and risk social problems because of the prioritisation of larger firms over small business and workers.

Restructuring your operations responsibly in a crisis can be done. It means working closely with all stakeholders wherever possible, and not making unilateral decisions without open communication and at least an attempt at consultation or engagement. The “panic stations” approach taken by some during this crisis has highlighted how everything they wrote in the front matter of their most recent annual report was complete nonsense.

What has been good to see is some firms choosing to draw down credit lines and leverage the support the banks are getting from central banks to tap their banking syndicate before doing highly dilutive equity raising in a time of high uncertainty. For firms that have a decent chance of doing well on the other side of the bridge, the extra medium-term debt in their capital structure is probably a better bet than an equity raise.

For small businesses, restructuring responsibly in a situation like COVID-19 can be almost impossible. To have the flexibility to do a responsible restructure, you already needed a strong balance sheet and decent cash flow history. Your banker will be aware of government guarantees, but you still need to be a good credit.

Many of the businesses most impacted by the collapse in sales simply were never and will never be good credits. Low margin, high volume businesses will only be good credits if they have some sort of collateral like owning the restaurant building or a distribution warehouse with a low loan-to-value ratio.

Completely independent of what policymakers may think, the banks still have their internal business rules around risk. Even though there has been some easing of regulation, that doesn’t mean the banks will suddenly make enormous amounts of credit available. The bank CEOs have been clear about this – they will eventually be picking winners and losers. Banks have the best transaction and risk data to consider whether the business they’re considering extending credit to will be able to make a good go of it on the other side of this pandemic.

An example of the difficult position small businesses find themselves in is that three main areas of risk – payroll, lease obligations and trade creditors – can’t all just be put on pause without consequences. A move towards cash on delivery and repayment of any deferred lease liability could mean that more businesses are untenable because of the higher working capital requirement alone.

This situation means that responsible restructuring will only be feasible for the strongest SMEs. They will need to innovate by creating new product and service lines that comply with changing consumer preferences. Their payroll will need to reflect the new normal, and if that means layoffs, paying out full entitlements or claiming wage subsidies to help employees through this is the right thing to do.

The rapid decision-making in a crisis can sometimes stop the risk of going out of business, but there are lasting consequences to any mistakes made during the process. Of particular concern are the audit and assurance risks around many of the decisions made. There will be an accounting for errors made by firms. In essence, banks will closely monitor the use of funds obtained by credit, governments will audit subsidies, employment regulators will audit layoffs, and tax offices will review tax returns and reimbursements.

The consequence of an irresponsible attitude towards restructuring during this crisis is that many businesses will not be able to reopen on the other side of the bridge. This scenario is different from the economic reality. In essence, some firms are simply not viable, and their directors have closed doors because that is the right thing to do in their particular situation.

Where I see a lot of risks is that because so many people have been negatively affected by this economic crisis, there will be a lot of judgement and community expectations around what “the right thing to do” really was during COVID-19. ESG risks must still be identified and managed appropriately during this crisis, just like the rule of law isn’t on hold. Boards and senior executives should consider how they’ve approached their response so far. If you can improve outcomes for stakeholders before the crisis is over, make an in-flight adjustment now. It’s better to alleviate pain than be the subject of investigative reporting or regulatory consequences once this is over.

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Sustainable Infrastructure And ESG Risk Management

The UN Sustainable Development Goals are a useful high-level framework for business to use in assessing its negative or positive social impacts. Global partnerships between government, NGOs, and the private sector will be required to achieve them by 2030.

The rise of community expectations around climate change and other ESG risks means that boards and senior executives can no longer function in “press release” mode when it comes to sustainability initiatives.

The management of ESG risk is a crucial part of your risk management framework, and firms need to identify and manage both quantitative and qualitative risks. The excuse that it is difficult to quantify some ESG risks will not cut it with stakeholders over the coming decade.

Institutional and retail investors will increasingly expect rapid and decisive responses to controversies, including the immediate resignation of directors and senior executives. “Riding out” the storm of displeasure will be very difficult given the increasing volume in the media on these issues.

One of the important considerations when thinking about sustainability reporting and the achievement of the UN SDGs by 2030, is that innovation and profitability in the private sector is a crucial success factor.

Many businesses have the opportunity to assess their current operating model, identify where and how they can make a positive social impact, and move towards implementing a responsible operating model that delivers for a full group of stakeholders while still generating an appropriate level of profit.

Goal 9: Build resilient infrastructure, promote sustainable industrialisation and foster innovation

Goal 9 of the UN SDGs is about how essential investments in underlying infrastructure are to enabling sustainable development. Technological efficiency, energy-efficiency, and increased productivity enabled by investments in transport, energy, technology, healthcare, education, and irrigation will all help developed and developing countries alike in improving their standard of living.

A lack of necessary infrastructure in developing countries means that their people are at a clear disadvantage when it comes to ease of access to more markets to sell their products and services. Sustained employment growth will become more realistic for some countries once appropriate infrastructure investments are made and brought online.

Environmentally sound infrastructure development will help achieve other sustainability outcomes while providing lower environmental impacts from infrastructure development. Firms who operate in the infrastructure sector will be able to share their best practices with developing countries to enhance ecological efficiency for new projects.

For firms operating in developed countries, assisting in developing countries and providing technology investments where feasible can help accelerate sustainable development. For example, substantial investment in mobile phone networks in Africa has enabled a wave of entrepreneurship and innovation to take place in previously unconnected communities.

Board and Senior Executive Considerations

Boards and senior executives in other sectors may not think they can have any impact on this particular goal. However, UN SDGs are a broad church of targeted outcomes for a global society. One of the more effective ways that any business can make an impact on these goals indirectly related to your business is through due diligence and standards for your broader value chain.

The first exercise is a current operating model assessment that looks at your present purpose, strategy, and operating model. The outputs of this exercise can be mapped at a high-level to each of the 17 UN SDGs to provide input into the next activity.

The second exercise is mapping the current operating model outputs to each of the UN SDGs and identifying the positive or negative social impacts your business currently has. There may be somewhere there are none, there may be others where some substantial impact is possible.

The third exercise is taking the first two exercises into account and re-examining the purpose of the business. Why do you do what you do? Is your goal relevant in the 2020s? Are you a sunrise or a sunset business?

The fourth exercise is then revisiting the business strategy. Does it help or hinder the achievement of sustainability outcomes? Are there any products or services that need changes or closing down in light of changes in community expectations today or anticipated changes in community expectations tomorrow?

Once the current operating model, mapping exercise, purpose re-examination, and strategy re-examination are complete, a broad group of stakeholders should participate in the development of a responsible operating model.

The current trend in transformation is to speak of the target operating model; however, in the 2020s, it will be necessary to design and implement a responsible operating model. Sustainability outcomes must be incorporated into the design and planning stages of any transformation program. If they aren’t, they won’t be delivered.

One of the changes in thinking about ESG risk is that the business case is about the enterprise value of the business itself. Issues that even five years ago may not have merited a mention in a footnote to a presentation could now present themselves as existential crises for a board of directors.

Over the past decade, the cost of implementing appropriate systems and controls to manage compliance risk has been billions of dollars for the financial services sector. The coming decade will see a further increase in required technology and project expenditure to give boards and regulators assurance that a framework is in place and monitored actively at all levels of a business when it comes to ESG risk.

Other industries have faced similar costs, such as the impact of health & safety legislation on the construction sector. But no one would argue that making sure everyone goes home from a worksite at night is less important than making a profit at any cost. However, 30 years ago, those arguments were undoubtedly being made by some construction sector executives and boards.

Times have changed, and old attitudes towards ESG risk will need to be updated. The current economic environment globally, where the asset markets have boomed, and many companies rebounded from the Global Financial Crisis after brief tests in 2008 and 2009 of their operating model, means that the next downturn will provide an opportunity for deep introspection and consideration of what a responsible operating model needs to look like for a secure strategic position relative to your competitors in the coming decade.

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Sustainable Economic Growth And ESG Risk Management

An environment of ever-increasing expectations on corporate leaders to do the right thing when it comes to sustainable business means it’s an issue to be taken seriously from the board-level down. The identification, active management, mitigation, or elimination of ESG risk from your operating model is a vital part of building a sustainable business that makes a positive social impact as well as delivering a profitable business for shareholders.

The UN Sustainable Development Goals provide a useful high-level framework for assessing your firm’s ability to deliver sustainability outcomes and is increasingly used by global firms as the core 17 areas for reporting their sustainability focus in their annual report.

You can map the 17 UN SDGs against your current operating model to identify the areas where your firm is making a positive or negative social impact. This exercise could assist in the analysis work before a transformation programme begins, ensuring that the development and deployment of the target operating model incorporate sustainability outcomes.

Ever-increasing community expectations around what businesses are doing to reduce ESG risks and deliver a positive social impact for a full group of stakeholders means that thinking about what a responsible operating model for your business incorporates can help the process of positioning your firm ahead of the curve.

Boards and senior executives might consider assessing their current risk management framework to identify whether the broad array of ESG risks as some choose to define them are present in their existing risk register.

Environmental, social, and governance risks can be much harder to quantify than many financial or operational risks. Firms should develop a defensible framework for estimating the cost of these risks and the severity of their impact on the operations of the business.

The business case for making significant investments into projects that reduce these risks and enhance the enterprise value of your business is clear. Increasingly, firms that do not take these issues seriously or engage in a press-release driven approach will find it difficult or impossible to raise capital.

Institutional investors in 2020 expect well-aligned corporate behaviours and communications on sustainability issues with their preferred responsible investing frameworks than even five years ago. Investor relations and corporate access teams at investment banks will have higher rates of inquiry from stakeholders who may previously never have engaged with them, and that means that the operating model for an investor relations function or corporate sustainability function needs to adapt and improve as part of the core operating model of the business, instead of being tucked away in a small department.

Goal 8: Promote inclusive and sustainable economic growth, employment and decent work for all

Goal 8 is about sustainable growth that cares about people. Eradicating global poverty depends on increasing the quality and compensation levels of workers around the world through raising productivity and sharing some of those gains.

In many developing countries, having a job doesn’t mean that your family is out of poverty. Roughly half of the world’s population lives on less than US$2 a day even with global unemployment around 5.7% according to the UN.

“Sustainable economic growth will require societies to create the conditions that allow people to have quality jobs that stimulate the economy while not harming the environment. Job opportunities and decent working conditions are also required for the whole working age population. There needs to be increased access to financial services to manage incomes, accumulate assets and make productive investments. Increased commitments to trade, banking and agriculture infrastructure will also help increase productivity and reduce unemployment levels in the world’s most impoverished regions.”

Some of the detailed sub-goals associated with Goal 8 include per capita economic growth, higher levels of productivity supported by investment in technology, a focus on high-value-added services, implementation of development-oriented policies, and eradicating forced labour and modern slavery.

8.1 Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7 per cent gross domestic product growth per annum in the least developed countries

8.2 Achieve higher levels of economic productivity through diversification, technological upgrading and innovation, including through a focus on high-value added and labour-intensive sectors

8.3 Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation, and encourage the formalization and growth of micro-, small- and medium-sized enterprises, including through access to financial services

8.4 Improve progressively, through 2030, global resource efficiency in consumption and production and endeavour to decouple economic growth from environmental degradation, in accordance with the 10-year framework of programmes on sustainable consumption and production, with developed countries taking the lead

8.5 By 2030, achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work of equal value

8.6 By 2020, substantially reduce the proportion of youth not in employment, education or training

8.7 Take immediate and effective measures to eradicate forced labour, end modern slavery and human trafficking and secure the prohibition and elimination of the worst forms of child labour, including recruitment and use of child soldiers, and by 2025 end child labour in all its forms

8.8 Protect labour rights and promote safe and secure working environments for all workers, including migrant workers, in particular women migrants, and those in precarious employment

8.9 By 2030, devise and implement policies to promote sustainable tourism that creates jobs and promotes local culture and products

8.10 Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all

8.A: Increase Aid for Trade support for developing countries, in particular least developed countries, including through the Enhanced Integrated Framework for Trade-Related Technical Assistance to Least Developed Countries

8.B: By 2020, develop and operationalize a global strategy for youth employment and implement the Global Jobs Pact of the International Labour Organization

https://www.un.org/sustainabledevelopment/economic-growth/

Board and Senior Executive Considerations

Boards and senior leaders will see that, like the other SDGs, there are several areas where any business can make a positive social impact. Procurement processes need to ensure that risks such as forced labour and modern slavery are not in your supply chain.

When you assess your current operating model, the key areas to explore when considering Goal 8 include people and culture processes and policies. If you are in financial services, finding what actions you could take to support the achievement of goal 8.10 would be a key focus. If you are in transportation or travel, exploring sustainable tourism such as going beyond net-zero or carbon neutral and thinking about carbon-negative operating models that create local jobs where you operate your business would be worth consideration.

The use of the UN SDGs as a high-level framework to map your current operating model against the ability of your business to deliver a positive social impact is a useful exercise for businesses. Many leading global firms already incorporate this reporting in their annual reports.

The decade ahead will be necessary for firms as they strategically position themselves to be ahead of their competitors on ESG issues. Moving beyond reporting and engagement to actively choose where your operating model (people, processes and systems) can adjust to improve positive outcomes or reduce adverse consequences will be tables stakes.

Institutional and retail investors are growing their awareness of ESG risks and expectations of the pace at which boards and senior executives will respond decisively if any controversies arise. Waiting it out or sending out a press release won’t cut it. Resignations and ending supplier relationships will become far more frequent and building a responsible operating model with in-built flexibility that can respond if a critical supplier needs to be changed because of an unacceptable level of ESG risk will increasingly mark the leaders in this space distinctly from the laggards.

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Sustainable Energy Goals And ESG Risk

The UN Sustainable Development Goals are a useful high-level framework to assess your firm’s ability to make a positive social impact. They cover a wide area of topics including equality, energy, climate change, responsible growth and more.

There are many frameworks that governments and NGOs try and get business behind. Each has its pros and cons. The UN Sustainable Development Goals are a global framework which enables comparison sustainability reporting between companies that operate in different jurisdictions or industry sectors.

Boards and senior executives should assess their current operating model against the 17 high-level SDGs to capture a baseline. They can then identify the areas of their operating model that make a positive or negative impact on these goals and generate sustainability reporting to track their progress in moving towards a responsible operating model that incorporates sustainability outcomes into the transformation process.

Goal 7: Ensure access to affordable, reliable, sustainable and modern energy

Goal 7 of the UN SDGs is to ensure access to affordable, reliable, sustainable and modern energy. Almost 1 billion people still don’t have access to reliable electricity, half of them in sub-Saharan Africa. Energy production and consumption are responsible for nearly 60% of total greenhouse gas emissions globally.

Globally, not even one-fifth of global electricity production is from renewables. There are many areas of energy that will need to improve over the next decade including energy efficiency, battery storage technology, renewable energy production, and reliable energy supplies for developing countries that doesn’t cost too much.

The benefits of clean energy for our planet are enormous. Reliable and affordable energy sources mean that cooking, cleaning, and necessary business activities become possible for people in developing countries.

In developed countries, increasing energy efficiency, even more, means that marginal energy producers that rely on fossil fuels such as coal, natural gas, and oil can sunset older plants and invest in renewables such as solar, wind, geothermal, and hydropower.

 Some countries have already made enormous progress in developing their renewable energy sources, including China which has some of the most significant solar and wind power initiatives in history in operation and under construction.

The ability to make an impact on goal 7 isn’t just for businesses in the energy sector. Responsible electricity consumption and energy efficiency initiatives are realistic in a company that uses electricity.

Thinking about the energy efficiency of your entire value chain including the energy efficiency of your suppliers and partners means that operational due diligence on suppliers should start to include questions around their electricity provider, their investments in energy efficiency, their analytics and insights into their energy use, and developing a strong understanding of their strategy to reduce their carbon emissions and increase the proportion of their electricity supply from renewable sources.

Board And Senior Leader Considerations

There are many different frameworks and reporting guidelines for sustainability and ESG risk. As at January 2020, there are no global standards like IFRS that enforce certain levels of disclosure. Some companies will not care about transparency on these issues because, for some, it could be “brand destroying” to be open about some of the ESG risks that exist in their value chain.

Boards and senior leaders should start with a high-level assessment of their current operating model. Working through the basics of your business model is necessary before launching into exhaustive ESG risk analysis.

  • What is your purpose? Why do you do what you do?
  • What is your business strategy?
  • How do you deliver your strategy?
  • Who delivers value to your customers?
  • Where are your operations located?
  • Who are your key suppliers?

The business model needs to be understood and decisions made on the boundaries of how much the board and senior leaders are willing to change the business model to achieve the targeted level of ESG risk in their business.

The risk management framework and risk registers will already include many of the risk themes that emerge during a strategic review of this nature. However, some of the ESG risks like social risk and environmental risk, are facing ever-increasing community expectations.

Boards and senior leaders need to be forward-looking in their identification, mitigation or elimination of these risks. They need to be ahead of the curve because an acceptable business practice today could be completely unacceptable from a social license point of view after one newspaper article or one tweet goes viral.

A great example of an ESG risk related to energy is the proportion of your electricity supply that comes from renewable sources. Some organisations have changed their procurement procedures to ensure that only the suppliers with the best effort on increasing renewable sources of electricity supply are even in the running for tender opportunities.

What does this mean? It means that because the era of the press release is over, boards and senior leaders need to be thinking long-term about how to position their business strategy so that their operating model does not give rise to any potential ESG risks that will put their economic engine at risk.

The business case for building a responsible operating model and reducing or eliminating as much ESG risk as possible is not just about return on investment. Customer satisfaction, shareholder approval, cost avoidance, revenue retention, regulatory compliance, social license maintenance, and employee satisfaction all have some elements that can be quantified to support the financial side of any business case for a programme of work to build your responsible operating model.

The UN Sustainable Development Goals have one significant advantage for boards thinking about how to measure and monitor their social impact. They are a global framework, and many major global companies already include their SDG reporting in their annual reports.

One consideration is that some companies are already so far ahead on adjusting their operating model to deliver better sustainability outcomes, that they could already “lock-in” a strategic competitive advantage.

Costs to businesses not taking ESG risk seriously can arise in visible areas such as the ability to raise capital. Look at how thermal coal companies are on the way to becoming unbankable as an increasing number of financial institutions globally stop lending, cut lines of credit, don’t take commercial paper, and don’t invest in equity or debt raises for thermal coal companies.

Thermal coal miners are currently losing their ability to raise capital. Retail and institutional investors will increasingly demand near-perfect delivery from boards and senior leaders on the reduction and elimination of their preferred definition of ESG risk.

The rising community expectations on these issues will impact a firm’s social license to operate, and focusing on short-term operating model changes that deliver outcomes will be judged better than long-term ambitions that will take decades to achieve.