World Economic Forum releases framework to help businesses identify ESG factors for long-term resilience

10X Industry

Mita Srinivasan
10X Industry
Published:

World Economic Forum releases framework to help businesses identify ESG factors for long-term resilience

New WEF analysis examines the process of “dynamic materiality”, releasing framework to help companies consider how ESG factors may become financially material in the future

Building a resilient business is increasingly dependent on preparing for the impact of non-financial factors, including those related to environmental, social and governance (ESG) issues. Given the current business impacts of COVID-19, companies are already dealing with financially material business factors that can develop suddenly. To succeed in the coming decade, investors and companies must equip themselves with forward-looking and proactive approaches to materiality.

The framework, developed by the World Economic Forum (WEF) in collaboration with Boston Consulting Group, helps companies identify these issues. It comprises four components:

  • Hyper-transparency of corporate practices in the Fourth Industrial Revolution

  • Escalating stakeholder activism fueled by social media

  • Changing societal expectation in the new age of stakeholder activism

  • Growing investor focus on sustainability issues

The framework for action gives guidance to investors on the signals to look for to better identify and manage dynamic ESG issues.

WEF’s white paper, Embracing the New Age of Materiality: Harnessing the Pace of Change in ESG, determines that what is financially immaterial to a company or industry today can become material tomorrow, a process called “dynamic materiality”. The whitepaper also introduces a new framework analyses how ESG issues have become financially material over time.

“As we’re learning in real-time with the outbreak of COVID-19 and its unexpected impacts, today’s companies must increasingly account for non-financial factors in their long- and short-term business plans,” said Maha Eltobgy, Head of the Future of Investing at the World Economic Forum. “As companies look to adapt their value creation plans in the new business landscape, they must optimize performance against current and future material ESG issues to safeguard their companies and ensure long-term success.”

ESG issues are increasingly impacting business. As social tensions and similar trends become more acute, these external social and environmental factors will become tangible financial costs for companies.

While companies are already feeling the impact of ESG factors on the health of their business, today’s era of increased transparency is also highlighting the importance of enhanced disclosures. Increased transparency also means that the rate at which currently immaterial issues are becoming material is accelerating.