By HUSNIYE GUNGOR
Turkish companies should enjoy and embrace environmental, social and governance (ESG) transformation to create value, according to Armando Guastella of Bain & Company. ESG is becoming a strategic lever for CEOs, who recognize its massive potential as a value generator, said Guastella, adding that companies outperforming in ESG ratings see their EBITDA performing 10-15% higher than in other companies. “They also benefit from higher company valuation and, depending on the sector, even an uplift of 40-50%. It is now evident that there is a clear correlation between long-term ESG delivery and economic value creation,” he said.
To Guastella, sustainability is now rightly understood as an opportunity and can no longer be considered as just a matter of compliance or solely reputational. He knows this well – he conducted the ESG CEO Pulse survey for the Investment Office of the Presidency of the Republic of Turkiye and Bain & Company, the global management consulting firm where he is a partner. A team led by Guastella interviewed 22 CEOs from 10 different sectors, a mix of Turkish companies and global players, to understand how CEOs in Turkiye are viewing and approaching sustainability in this complex economic environment. The survey mainly sought to see how CEOs are setting up their companies to seize the opportunities offered by the ESG revolution.
The pandemic, along with other substantial challenges faced from 2020 onwards, highlighted our socio-economic fragility as never before, said Guastella. “These aspects contributed to accelerating the importance of sustainability in a phenomenal way, not only from an environmental and climate change perspective but from a much wider ESG scope,” he said.
“Of course, there is an ethical aspect, and more importantly the compliance aspect, maybe not yet in Turkiye, but it’s going to arrive. However, based on my experience, there is proof that you can improve your performance in terms of EBITDA by implementing ESG. Especially in B2C businesses, customers are not only willing to pay a premium to use sustainable products or services, but they might not even buy if a product or service is not sustainable.”
This creates an opportunity for companies to change their business model and develop new products to capture a larger market share, he thinks. The uplift in terms of revenues or terms of marginality for doing so can be far higher than the cost, he said. Guastella was extremely surprised about the commitment of the business leaders in Turkiye to ESG, the time that they dedicate to these initiatives, and the level of awareness that they have about this topic. Given this was the first time the survey was conducted, surveyors only spoke to the C-Suite. “What would be nice in the next year is to do a deep dive on specific topics, such as emissions, diversity, and inclusion or governance in a way that we can be more specific, focusing on something on something more precise,” he explained.
TURKEY’S MATURITY LEVEL IS DIFFERENT
Comparing the ESG scene in the Turkish corporate world with the global outlook, Guastella underlined the different levels of maturity in terms of ESG in European and U.S. companies due to strict regulations in that part of the world. However, already having a strong commitment to ESG, does not necessarily correlate to a state’s ability to deliver in the future. “There have been already a lot of things done [in Turkiye], especially on the side of delivery, despite the lack of clear regulation and enforcement of these things. The young population, the digital maturity, and the fertile tech ecosystem can facilitate the delivery. Although Turkish companies are behind other countries with regulations, there is a huge opportunity for them soon,” he said.
Not having clarity on regulations means that you are not sure whether what you are doing is right. So, clarity of regulations is the most important thing. Companies that participated in the ESG CEO Pulse survey believe that they can manage the ESG transformation better with some incentive schemes. However, it is important to make the government understand the needs of different sectors so that they can provide incentives, said Guastella. “That’s why we need a proactive approach to the ecosystem. Incentive schemes need to be co-created between the government and the companies,” he said.
INVESTORS NEED TO BE BROUGHT INTO ESG EFFORTS
Sometimes, efforts toward ESG can be misdirected or misguided, but seem substantial. “First of all, the market is not perceiving exactly what you’re doing. Second, it is difficult for the management of the company to pursue sustainability if they don’t know what the outcome will be. Investors, of course, need to understand how you are performing in emissions, diversity, and inclusion,” he detailed.
So, what Bain does is set an overarching ambition strategy for a company. Then, they create a mechanism to measure the ESG and financial impact. Last but not least, they orchestrate communication and reporting. Today, there are more than 600 ESG ratings, which can be overwhelming for companies. Bain helps companies to create a roadmap. “No company can do all these by themselves,” said Guastella. “But based on our knowledge of the investor point of view, we can provide huge value-added in making companies understand where they need to focus to attract investors, which is linked to this exercise of attracting FDI for the Investment Office.”
Bain & Company’s journey in Turkey started 10 years ago. With a change in strategy to focus on the Southern Europe region, the Turkiye office came under the management of the Italian office. The company also has a focus on the entire Mediterranean region, which is why Armando Guastella is based here. Since they opened the office here, Turkiye figures have doubled not only in terms of revenue but also in terms of people. The number of employees in the Turkiye office is slated to reach 60 people in the next two years. “We believe in the bright future of Turkey internally as a local market, but also as a regional hub,” he said. “So, for sure, from our side there is the willingness to invest and understand more. And we can support the government in this sense.”
USD 1bn for pro-bono consultancy in ESG
Bain & Company works with big private companies as a consulting firm but they do not want to limit their activity to this scale. “We want to have a lot of social impact. Sometimes some organizations can have a huge impact in terms of social and governance, but they might not have the ability to buy our services. So, in most cases, we are proactive in helping these organizations, such as NGOs. We help them in generating higher impact, and this way we can pursue some initiatives that are in line with our ESG approach.” The company has allocated more than USD 1bn for pro-bono consultancy work over 10 years.
Five key messages emerged from the ESG CEO Pulse survey
1. THE GAME-CHANGING NATURE OF ESG IS CLEAR
63% of CEOs considered ESG to be a complete game-changer. Having an ESG agenda and taking a leading role in driving this transformation is a massive advantage to companies – an ESG mindset helps companies to predict risks, build resilience and find new opportunities to make their businesses grow. However, more than 50% of CEOs agree that the pace of change is still too slow and that more needs to be done for all players to embrace change.
2. IT’S TIME TO PICK UP THE PACE
82% of business leaders stated that they are ahead of the competition when it comes to ESG efforts and impact and 64% of them declared that they don’t want to be just compliant with regulations, they want to lead their industry. However, despite this bold ambition, there is currently a missing link between effort and the ability to evaluate the impact generated: while commitment and sustainability targets are usually in place, there is a gap when it comes to measuring results.
3. POSITIVE BUT CHALLENGING ROAD TO SUCCESS
62% of CEOs are satisfied with their journey of transformation and all have had a positive experience as part of the sustainable revolution. However, at the same time, 40% of business leaders find it challenging to push forward the ESG agenda, with 46% of them highlighting the cost of transformation as the most important barrier, by far. This makes the ability to measure economic impact even more relevant, to justify such important investments.
4. INTERNAL AND EXTERNAL BARRIERS REMAIN
There are various barriers to achieving ESG goals: 29% of respondents mentioned the availability of incentive schemes and 26% identified clarity of regulations as the main barrier to faster transformation, with government initiatives and more precise regulations considered essential for enabling and speeding up the change. 23% of business leaders stated that in terms of internal factors, setting clear ambitions and targets is considered crucial in obtaining the right level of commitment from the management team and embedding ESG DNA within the company decision-making process.
5. THE DAWN OF A GREAT OPPORTUNITY FOR TURKIYE
83% of CEOs stated that stakeholders’ requirements heavily influenced their business models. Sustainability is widely considered by business leaders as a strategic lever to create value and uncover new products and business models. With a young workforce ready to embrace change, a high level of digital maturity, a fertile tech ecosystem, and rich supplies of natural resources, Turkiye is in a good position to seize the opportunities from the sustainability revolution. This is especially true in energy and technology-intensive sectors like manufacturing, energy, and automotive where the country can really leverage its capabilities.