‘Stakeholder Perceptions of Environmental, Social and Governance Issues Impact Organizations’ Bottom Line’

Michelle Remo, “Big 4″ observer
June 15, 2012 /

According to a new report from Deloitte, an organization’s understanding of how its stakeholders perceive and value the organization’s environmental, social and governance (ESG) issues is central to developing a strategy that may lead to financial benefits.

The report, titled “Drivers of Long-Term Business Value: Stakeholders, Stats and Strategy,” discusses the impact employees, suppliers, shareholders, community members and other people or groups involved with an organization can have on business performance. Today, there is a broader range of stakeholders than there was in the past. This is contributing to raising the bar on business performance as evidenced by regulatory pressure, consumer boycotts and decreasing market valuations for organizations reporting labor, health or environmental issues.

The Deloitte report provides strategic considerations for creating stakeholder value to generate long-term business value.

“It is essential for businesses to understand what their stakeholders consider to be of value in the business and how those stakeholders perceive the business’s actions,” says Eric Hespenheide, a partner at Deloitte & Touche LLP who serves as audit and enterprise risk global leader for sustainability and climate change services. “By determining a value for ESG issues, a company can better articulate the interdependencies of various stakeholders and their role in how the company generates long-term business value.”

Dinah A. Koehler, a senior manager with Deloitte Services LP and coauthor of the report, adds, “More organizations are starting to realize that management of ESG issues is not an ad hoc undertaking. Instead, the strategic pursuit of ‘stakeholder value creation’ can be key to improvement in a company’s financial value.”

This process involves identifying key stakeholders who consider an organization’s industry, its business model, its value proposition, its product portfolio and its competition. In addition to recognizing what issues stakeholders care about, it is also necessary to determine the expected level of ESG performance and how it parallels societal norms, the performance of industry peers, an ideal or aspirational level or an unacceptable state. To do this, companies should regularly consult with key interest groups — both internal and external — to fully understand how, when, why and by how much an ESG issue might impact the business.

Deloitte’s report talks about how and why ESG performance is a consideration in financial valuation in the near term and also points to long-term value creation — not only for senior executives but also for business partners who are making demands of management and for shareholders who increasingly pay attention to ESG issues.

In addition to stakeholder engagement, issuing a steady stream of positive and credible ESG performance reports can create a halo effect and may help insulate a company from criticism and protect its valuations.

 

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