A recent client conversation on the critical roles of purpose, shared ethical values and corporate integrity in not just doing responsible business, but being a responsible business, sparked a fascinating debate on whether ESG (environmental, social and governance) is here to stay, and why ESG has the potential to be much more than CSR.
The distinction between ‘doing’ responsible and ‘being’ responsible is critical here. The ability to execute business that is ethical, sustainable, inclusive, and environmentally friendly is not easy, to say the least. However, for this to be done consistently, during good and not so good times, and to be delivered in alignment with long term strategic goals and not just short term business targets, requires more than outstanding transactional or operational abilities. It requires an inherent sense of doing the right thing, a wider vigilance about the consequences of one’s actions, and a willingness to be held to account, all which are reflected in not what is just said and done, but in what is believed.
Our ability to embed environmental, social and governance factors into the DNA and fabric of organisational strategy and decision-making offers opportunities far beyond process improvement and productivity gains. It gives us hope that we can all prosper and flourish collectively, whether employee, supplier, investor, consumer or corporate citizen, in a world where the dignity of the environment, and of each of other as individuals, is respected and valued.
This is why ESG is here to stay. At a base level, the demands for greater transparency, reporting and disclosure is going to drive greater insight into how business is governed, conducted and the real outcomes on employees, wider society and the environment. However, ESG can achieve much more than that. Evidence is emerging that a better ESG score translates to about a 10 percent lower cost of capital as the risks that affect business are reduced, if the business has a strong ESG proposition. It offers an aspirational path for organisations to develop the level of risk resilience that is needed in the VUCA world of today. It can attract and retain the high performing talent, shape the leaders of tomorrow, create value, and grow financial and non-financial prosperity in a way that is grounded in fairness, integrity and respect.
The ethical stickiness of the human impact of ESG is a hallmark of its longevity to come.
ESG has the potential to be a fully integrated, strategic and values-based business imperative that is closely connected to the purpose of business, hard-wired into the day-to-day operations and valued organizational behaviours, and sought after by the stakeholders it serves. It puts CSR at an elevated level which, arguably, was never even envisaged.
For example, it was recently reported that ethical lapses, rather than financial performance or boardroom struggles, claimed the jobs of more corporate leaders than ever before[1]. A combination of technology and declining trust[2] levels mean that protests can escalate quickly, which can result in swift CEO changes and vulnerability at the very top. ESG as a movement is behind this, plus more. It is also about the pace and volume at which our world is changing around us, with deforestation, flooding and global warming; how first world poverty is driving unprecedented global inequality; and how racial tensions and threats to democracy across the world are now becoming unavoidable Boardroom risk agenda items.
This is why ESG has the potential to be so much more than CSR. The three factors of ESG link together, via strong ethical principles, such that the environment, the social factors, and the extent to which you have good governance, collectively affect your license to operate as a business within the external world. This is not about marketing techniques or disconnected communication campaigns, which at their worst, have enabled corporate inaction in the past. And it is certainly not about business leaders outsourcing these challenges to a single corporate function to address them in isolation.
ESG targets areas where we need genuine, persistent and transformational changes for us to experience a better world. It is data driven, quantifiable and measurable. It is a tangible indication of not only living the ethical values that lie at the heart of doing good business, but the belief of leaders in using the power and the platform of business as a force for good, to make constructive and responsible change that benefits us all.
Are you ready to be ESG sticky?
[1] https://www.strategyand.pwc.com/gx/en/insights/ceo-success.html Accessed 9 November 2020
[2] https://www.edelman.co.uk/research/edelman-trust-barometer-2020 Accessed 9 November 2020