2020 laid bare many challenges – whether decades in the making or the product of unforeseen disruption – that the country must overcome. A dynamic city with tremendous potential for growth, Los Angeles is no different. The pandemic, natural disasters, and racial justice protests exposed deep and multi-faceted economic challenges and racial inequalities in our community. Increasingly, these issues are directly connected to outcomes for LA businesses, creating momentum for companies, whether multinational corporations or regional businesses, to devote more attention to their impact beyond the bottom line.
Known as Environmental, Social, and Governance, or ESG, companies are increasingly focused on aligning their business strategies to drive long-term value for the communities in which they operate as well as their employees and customers. This concept is not new. It has gone by many names, but the urgency and focus now is different.
Today, a KPMG survey shows that 80% of the top 100 companies by revenue are reporting on their operational sustainability. That’s up from 40% in 2005. Joining this movement will create more resiliency in our economy and benefit this city’s businesses and people.
LA businesses face the same imperative as competitors from across the country and globe. The risk today for many companies and firms is falling behind on ESG. At stake: access to, not cost of, capital. Already, BlackRock, State Street, Nasdaq, and other investor groups are demanding action by companies. Competition for top talent is increasing with 9 out of 10 workers willing to take less money for more meaning in their jobs. Reputational risks can also affect the bottom line. Most importantly, ESG can help broaden a business’ lens to understand new risks to its strategy
At the same time, LA businesses face unique challenges. In particular, if climate change is left unaddressed, wildfires, among other problematic conditions, will only grow more frequent and severe. Further, entertainment, including music shows, movies and television, as well as sports and theme parks were all impacted by the pandemic, in which some racial and ethnic minority groups were disproportionately affected. Given the incredibly diverse population of Los Angeles, it’s also important that businesses are represented by Los Angeles residents of different races and genders.
As a global city, Los Angeles has an opportunity to lead this renewed global movement on ESG. A rich, diverse economy well beyond entertainment, the City of Los Angeles touches a host of industry sectors, including aerospace and defense, advanced transportation, information technology, trade and logistics, creative design, food manufacturing, bioscience, and more. We can lead across industries, charting a new path for our city, region, and the global economy.
But some continue to view ESG momentum skeptically. They don’t just want companies to speak to these issues. They want tangible action. And they want companies to “prove it.”
Boards have a unique role to play in answering the “it.” They must take an active role in driving ESG discussions with their management teams, aligning on strategy to ensure the actions taken have true impact.
For example, on diversity, Boards should consider asking management to conduct a diversity risk assessment to better understand the strategic, legal, talent, and reputational risks posed by the company’s diversity profile to help focus and accelerate initiatives to diversify its leaders and workforce.
The audit profession, which brings independence and that skepticism in serving and protecting the capital markets, is uniquely positioned to help companies understand what qualifies as “proof.”
Companies can report ESG metrics in a variety of ways. Standards are evolving and, in some ways, beginning to align. In fact, less than a year ago, the World Economic Forum’s International Business Council (IBC), comprised of 140 CEOs and the Big 4 accounting firms, outlined a reporting framework for environmental, social and governance standards, proposing 21 core metrics and 34 extended metrics that cover issues ranging from emissions to social factors, marking the first truly coordinated approach to ESG reporting.
Los Angeles has a significant opportunity to set an example for cities around the country on how to best prepare for what lies ahead. To position the Los Angeles business community for a bright future of global connectedness and economic growth, it is critical businesses seize this opportunity and join a global movement that promises to create real economic value for the city.
Michelle Wroan is the KPMG Los Angeles office managing partner.
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