Why Geopolitics is Fast Becoming the Added G in ESG
Seeing ESG through a new lens
The view from the top must evolve, according to new executive opinion survey findings. Just like each successive turn of a kaleidoscope, C-suite leaders must continually evaluate their businesses through constantly changing lenses. For those keen to keep pace with the rapidly shifting environmental, social, and governance (ESG) landscape, the newest of those lenses is the need to take a crucial new view of geopolitics and what it means for their ESG risk practices. Geopolitics, some believe, is now so important, it’s actually becoming an additional “G” in ESG.
News headlines everywhere underscore the impact of why the added “G” is reshaping organizations’ views of ESG. Institutional investors now rank geopolitics close to the top of their list of critical threats to strategic success, second only to talent. In a recent EY Americas Center for Board Matters survey, 42% of investors went further to name geopolitical turmoil among the three biggest threats their portfolio companies currently face, catapulting it up from 10% last year — when it was close to the bottom of the 2022 ranking. Investors now demand intense scrutiny into how companies monitor and manage geopolitical risk exposures for their organizations with particular emphasis on supply chain, cybersecurity, and consumer expectations.
Although global connectivity has provided the backdrop for rapid innovation, impressive growth, and increased prosperity for years, today’s geopolitical tensions and economic challenges are changing business dynamics for every organization across the world. Factoring in the geopolitical lens is now crucial for C-suite leaders to gain additional perspective that also informs governance. Global organizations need new, sophisticated ways to understand, monitor and plan for potential geopolitical impacts on their business, their people, and their stakeholders.
The added G’s impact on the E and S of ESG
There is no more powerful example of the connection between geopolitics and the environment than the war in Ukraine. The conflict has exacerbated the energy crisis and impacted Europe’s overall energy picture. Many countries are now re-evaluating their reliance on traditional fossil fuels as a result and considering an accelerated transition to energy diversification for greater security and sustainability going forward.
Developing countries face greater ESG challenges. Many already request greater leeway to achieve emissions targets and sustain their economic development. Some also need additional consideration during climate-related disasters, such as the recent flooding in Pakistan, when the impact of these events can be harsh and severely tax the limited resources required to rebuild.
In the US, global companies are awaiting the SEC’s publication of climate disclosure regulations to understand the details of what will be required to comply, even as they stay on top of compliance requirements in other geographies where they operate.
Meanwhile, 82% of more than 500 C-suite leaders and members of Fortune 1000 executive management teams responding to a recent EY survey confirmed that carbon emissions reduction initiatives and the achievement of net zero by a target year are both key objectives for their companies.
Turning to social, two out of five of those same Fortune 1000 company executives report a focus on sustainability and ESG initiatives related to social equity — a key concern for employers, customers, and other stakeholders. Its intersection with the new G — geopolitics — can present reputational and sanctions risks related to human rights. This is, of course, a particular concern where labor practices do not meet international standards or are not aligned with an organization’s values, whether that entails slave labor or unsafe working conditions.
Geopolitics: a board priority, too
As geopolitics took center stage this past year and global organizations felt the effect, the additional G surfaced as a 2023 board priority, as the EY Americas Center for Board Matters board priorities survey demonstrates. Nine out of 10 Fortune 1000 executives responding to the survey also say their board now has oversight of their organization’s sustainability and ESG agendas.
It is clear boards need to view these issues through a new lens, too, discussing them with executive management of the organizations they advise to evolve more systematic ways of managing geopolitical risks, based on a rigorous evaluation of how various types of geopolitical events could impact operations and strategy. These dialogues and preparation can help build organizational resilience and encourage business dynamism. They’re also part of an essential assessment of the potential effects on stakeholders while planning for and anticipating external risks.
Build and execute a geostrategy to manage the new G in ESG
The added G also contributes to good governance — the traditionally accepted G of ESG. If geopolitical understanding is incorporated into risk management and opportunity assessments, the economic and human benefits of global connectivity will grow.
While any geostrategy should be managed from the top down, organizations also need to develop or review the related cross-functional integration of political risk management into broader risk management, strategy development, and governance. Those that have strong sustainability programs typically have a well-defined corporate purpose that provides guardrails for decision-making in a time of crisis. Building a geostrategy that integrates with ESG can help prepared organizations respond to political risks even as they advance their own sustainable business practices.
Those organizational leaders that continue to turn the kaleidoscope lens to reframe their perspective on ESG issues will be the ones that gather the crucial insights to create effective resilience, foster sustainability, and build value for their people, their communities, and their clients.
The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.
Orlan Boston is a senior partner and executive and catalyst, connector, and convener deeply committed to bringing people and organizations together for fundamental change and global impact. Currently serving as EY’s Americas Sustainability & ESG Markets Leader, he is responsible for creating and leading the EY Sustainability & ESG practice, go-to-market practices, services, solutions, and offerings. He chairs the EY Americas Sustainability & ESG Leadership Team and serves on EY’s Global Sustainability Executive Committee, EY Americas Markets Leadership team, and EY’s Global Social Equity Task Force.