Sustainable Cities, Social License To Operate And Managing ESG Risk

The UN Sustainable Development Goals are a useful high-level framework for benchmarking your firm’s sustainability impacts. The 17 goals include issues such as climate change, reducing inequality, improving access to clean water, and building global partnerships between the public sector, private sector and NGOs.

Many top global firms already use UN SDGs in their annual sustainability reporting. They have identified where they can make an impact, and taken steps to reduce any negative consequences from their activities worldwide. They are just one of the many sustainability reporting options available to boards and senior executives.

Goal 11 of the SDGs is about making cities inclusive, safe, resilient, and sustainable. I think this is one of the dark horse goals of the SDGs – cities are so critically important, and nearly every country in the developed world has problems with their cities let alone some of the issues developing countries have with some cities development.

Many people want to move to cities because that is where opportunity exists. For some countries, only one city will be able to offer the incomes and opportunities that people desire. Some firms may want to think about how locations work in their operating model. There may be opportunities to build partnerships with cities that can offer employees something different in lifestyle or work-life balance.

Because cities are always evolving every day because of individuals choices, there is only so much that firms can do to help build sustainable and resilient cities. Central planning and coordination aren’t always going to align with how people want to live in the real world. Deeply ingrained cultural preferences seem to reject density and better investment in public transport.

Boards and senior executives may choose to diversify their locations away from large cities. However, large cities are still where much of the skilled workers live and are available for work. Remote work has not nearly been as prevalent as the technology could make it. Face-to-face communication is still critical for business-to-business sales and relationship management, for example.

ESG risks when it comes to city sustainability and resiliency may emerge in a firm’s real estate portfolio. Disclosure of the environmental impact of office space, retail space, and industrial space you own or lease will be required. Because of the ever-increasing community expectations on sustainability in supply chains, other participants in your value chain will need to share this data with your sustainability team.

Board and senior executive considerations

Understanding your current operating model and the locations where your value chain takes place is a crucial requirement for understanding your firm’s ability to make a positive social impact on Goal 11 of the SDGs.

If you are currently operating a flexible operating model with a wide range of vendors performing essential outsourced functions to deliver outcomes for your customers, understanding how they understand and manage sustainability in their locations is critical.

One of the ESG issues I predict will increase in severity in the 2020s is a backlash against large corporations using partnerships with cities to extract unfair advantages or subsidies over competitors. Some companies even play cities off against each other to see how much they can obtain from the public sector.

This sort of corporate behaviour will increasingly be scrutinised and punished. When inequality is higher, and many large firms have an already shoddy reputation, taking advantage of ratepayer or taxpayer money will become more difficult. The use of partnerships with cities will need to be carefully thought through to manage any ESG risk. The use of robust governance procedures and probity around these arrangements will be necessary.

One particular problem for some firms will be how they respond if one of their locations is green, sustainable, or low-impact on the environment – but a significant part of their value chain is delivering a negative social impact for a particular city.

Finding yourself in this situation may be easier than in decades past. The need to revisit your purpose and business strategy in a highly competitive environment with increasingly strict guardrails on all forms of corporate decision making mean even making appropriate business decisions like closing down an unprofitable part of your business will leave you pilloried.

Politicians on the left have increasingly used the phrase “a just transition” when it comes to moving workers from sunset to sunrise industries over time. If predictions about rising automation and its impact on jobs eventuate, then firms will need to delicately manage the changes in their labour requirements to avoid controversy.

The assessment of the current operating model of your firm should include observations on the automation potential for different parts of your organisation. Streamlined and automated customer experiences mean that many frontline roles will reduce over time and increasingly, higher-skilled workers who never expected automation out of a job will be in the firing line.

The constraints on corporate decision making mean that a press release driven approach to thinking about your impact on a city you operate in won’t cut it. Genuine partnerships with employees, suppliers, local and regional government, and other stakeholders will need investment.

Boards and senior executives can consider the perception of location changes within cities as well. For some employees, a location change could be extremely disruptive to their lifestyle, for example, if both parents are working. A serious consideration of how many people won’t apply for new roles at the new location should be part of the business case in these situations.

ESG risk management is comprehensive, and when you are operating under resource constraints in a competitive environment, tradeoffs will be required. This shift means that most CEOs will have to go back to the drawing board and revisit the purpose of their organisation.

Once they’ve done that, a radical transformation of their strategy and the design and implementation of a responsible operating model that enables them to deliver value to a wide group of stakeholders will be part of the execution side of their role.

The identification and triage of ESG risk isn’t a checklist exercise. It’s part of the risk management framework and will need to be embedded in the culture of a firm if there is any chance of avoiding existential controversies that destroy your firm’s social license to operate.

There are many businesses in 2020 that will not survive until the end of the year because of their indifference to ESG risk, let alone through to the end of the decade. Rising community expectations from the corporate sector mean that directors will need to interrogate the board reporting they receive and ask tough questions carefully. They don’t want to end up in the witness box of the next Royal Commission.