Demystifying ESG for businesses to achieve implementation efficiency in tackling priority development challenges while maintaining their bottom line
Article
Sarah Adomakoh, Founder & Principal, MWG
Investors are increasingly calling for greater accountability in how their current and prospective investee companies deliver positive and adverse impacts to their communities, workers and customers. Implementing environmental, social & governance (ESG) internal operational strategies is no longer a simple 'do good CSR to-do' list for businesses to score marketing points. Starting out right in order to prevent the wrongs is the biggest pain point of all. Let’s break this down.
The Cause (The Call)
Environmental and social outcomes, and workplace policy environments are directly impacted by the way we do business, and the organisational mindsets that shapes this. Therefore, the Importance of ESG principles in driving values-based business leadership and corporate citizenship to deliver social impacts while maximising shareholder profit, should not be understated.
It is no longer acceptable to operate as a depleting minded business, or simply within a sustainable-mindset, in which companies seek ways to replace valuable resources that they depleted in the process of achieving their individual profits. When viewed from the perspective of environmental standards, a sustainable minded business seeks environmental sustainability goals of achieving net-zero carbon dioxide emissions and this standard is accepted globally.
However, from a human development perspective and in adherence with human rights standards, what is not accepted practice is; any business that inflicts harm (violence, loss of health, wellbeing, quality of life and life itself) to individuals and communities directly or indirectly, through its routine operations, and at the same time seeks to balance the scales by creating tangible social value through other components of its operations, CSR or corporate philanthropy.
In a globalised interconnected social media-inspected world, where harmful outcomes cannot remain hidden or silenced, stakeholders concerned for the future of the planet and envisioning more cohesive societies are calling for businesses to adopt regenerative mindsets. Under this mindset businesses seek to do no harm and put back more into the ‘Environmental’ and the ’Socioeconomic' aspects of development than they take out to achieve their profits. Company executives are increasingly being asked to get their own house in order. For example, employee fair compensations and promotion policies, or executives giving time, voice and platforms to tackling existing or emerging national policies that threaten to further disempower and exclude the voiceless and underserved.
Demand (the 'push' to get moving)
The noise is getting louder. How businesses respond to development concerns such as the global climate crisis and socioeconomic inequalities, and extents to which they prevent or mitigate adverse impacts is now of critical concern to key stakeholders including current and prospective employees, consumers and investors.
Businesses be warned: The more pivotal the role and audible the noise of the stakeholder, the more the 'irresponsible businesses' are likely to suffer adverse financial consequences in the long-run, whether it‘s their share value, reputational and brand value or consumer loyalty.
For example, recent investor surveys like those undertaken by Russell investment survey 2018 and 2019 are revealing that ESG-oriented investing among the NON-impact investor community is being amplified over the past 5 years, with rapidly increasing levels of ESG awareness and assessments of ESG integration into investment decision-making being undertaken among asset managers.
Asset managers are going beyond the traditional financial focused company analyses undertaken for these group of investors. Impact investing strategies are being balanced with old traditional investment approaches (coined as ‘integral investing’ by some specialists), whereby maximising shareholder value also means achieving the ideal balance between social value creation and commercial gain and demonstrating authentic and integral corporate citizenship, with clear impacts on environmental and social concerns.
Read more: The global sustainable investment review demonstrates that ESG-oriented investing has experienced a meteoric rise. Global sustainable investment now tops $30 trillion—up 68 percent since 2014 and tenfold since 2004.
Read more: Russel investment survey 2018 and 2019
Businesses and investors must now go beyond expressions merely of intent and piecemeal actions and deliver impacts that truly actively demonstrate their pivotal role as a business, in creating inclusive economies. The big players are expected to set examples that have ripple effects in shaping corporate decision-making around their ESG contributions to the SDGs. For example, one clear and urgent need for this is setting the tone on how to more fairly distribute corporate wealth between the shareholders across the board, to low-skilled and low-waged workers whose inputs directly influence productivity and profits reaped by successful companies, yet from the dawn of time, they have gone wholly unrewarded as we continue to observe companies’ profit margins expand and shareholders compensation rise commensurately.
For most growing and large businesses — business 'as usual' has been turned on its head, where social value is just as important as commercial gain — we have entered a new era, setting sail towards a new horizon
There is no going backwards or standing still - companies are being challenged to reimagine their fiduciary duties, citizenship and value maximisation with regards to ESG outcomes. But they can’t achieve maximum impact alone: It takes the tripartite approaches to get this done (governments, private sector, community groups). Multi-stakeholder dialogue and expressions of noble intent to do good and demonstrate impacts are occurring in droves so that we find ourselves in a repeating cycle of slow collective progress amid a lot of talk. There are certainly investor and corporate-led initiatives succeeding incrementally, but what is urgently needed - at county, state and federal/national government levels, is the coming together of well-coordinated function-defined ecosystems where successful networks are connected with other networks, with learning and sharing of evidence and data, and successful response models are accelerated; policies, timelines and joint actions are committed to, and enacted amid the increasingly noisy dialogue. If not, stakeholders are at risk of rhetoric and procrastination, reaping great cost-inefficiencies in our siloed efforts, and getting very little done to ensure that collective private-sector ESG actions really do accelerate the achievement of the UN SDGs by 2030.
So, how do companies with varied resources, assets, networks, community and market positioning, risks, across different industries, etc., really get down to the nitty gritty of all things relevant, and make the ‘right’ operational changes that promote purpose and impacts, and grow profits?
Charting a Course and Navigating Uncharted Territories amid Uncertain Climates
Companies setting sail to manoeuvre through the ESG uncharted waters as part of an integrated and comprehensive business strategy aim to deliver maximised social value and gain tangible commercial benefits, but beneath the murky waters lie the challenges of what internal operational and external issues to focus on to deliver maximum all-round benefits, what constitutes realistic targets, and how to measure achievements.
With so many potentially harmful (to shareholders, employees, environment, communities and customers) outcomes to navigate and preventive standards increasingly becoming mandatory and requested by multiple stakeholders for different purpose (e.g. financial materiality, social value, or both), companies are challenged to elevate their citizenship and ESG contributions towards the greater good. Most importantly, corporate leaders are challenged simply on getting started and knowing what development impact areas to prioritise, and why and how it will affect their profits. One thing is certain - It is evident that companies that adopt the ESG principles as part of an in-built strategy, rather then the common approach that treats ESG uptake as a piecemeal and voluntary add-on, gain more in the long-run.
For example, these companies report increased investor interests and consumer loyalty, deliver tangible contributions towards the SDGs, making for better branding, tapping into new markers and attaining increased operating profits. But where do well-meaning companies start? Taking into account different growth stages, size, industries, unique trade secrets/value features, strategic assets, underlying empathy and culture, and growth journey, it is never a case of one-size fits all.
Planning the way forward, setting the vision (where to touch down) and getting started is the most stifling aspect faced by companies in their drive to achieve the right balance in their ESG strategy and partnerships, and to be most efficient in the implementation process.
Most importantly, companies of all sizes and growth stages remain challenged on how to track and measure impact of their actions. A challenge that must be solved in order to demonstrate the true value that a business brings to its customers, communities and investors.
Setting Sail - The Impact Journey
Business’ ESG responses are usually implemented across the 3 interconnected pillars of People, Planet and Profit. ‘Social’ and ‘Environmental’ actions fall mainly within the ‘people’ and ‘planet’, pillars, while transparent, effective governance requires that workplace policies and standards are set in compliance with external recommendations and legislation, and then enacted and tracked within all companies. In particular, good governance also requires that governing leaders have a detailed picture of how these enacted changes will directly and indirectly impact the companies’ bottomline (‘profits’) and work towards achieving the best balance.
ESG principles are inextricably linked with business operations in that they are indirectly and directly impacted by the way business is conducted, particularly environmental and social impacts, but with the dimensions I’ve cited below, overlapping significantly. For example, 'E' and 'S' are best guided by related transparent and effective governance that requires that workplace policies and standards are set in compliance with external recommendations and legislation, enacted and tracked within all companies.
Tracking and ESG reports requested by investors, asset managers, and buyers require more transparency and consensus on what is reported. Herein lies a great dilemma.
Given this fact that business practices impact a spectrum of ‘E’ and ‘S’ interconnected outcomes, businesses must seek compliance with the copious intertwined dimensions that underlie the broad framework that defines ESG. They must find ways to monitor and track processes and outcomes, adopting approaches and systems that are most efficient. They must consider how their operations, structuring of strategic business units and governance directly and indirectly impact these dimensions and how the company is best positioned to identify and remove adverse actions (do no harm) and at the same time make revisions that will add value to benefits delivered by the company to most disadvantaged communities or groups impacted by their operations. Key dimensions that any given company can consider can be broadly summarised or grouped as follows;
Environment - Responsible management of a company’s inputs to its production activities and to actions taken to avoid adverse environmental impacts including depletion of natural resources, the use of materials or chemicals that are potentially damaging to people, animals or environment, so as to accelerate achievement of Net Zero carbon emissions and tangibly fight the existential threat that is the global climate crisis.
Social Capital - Responsible management of a company’s relationships with customers communities, public sector and other private sector actors and contribution to sustained wellbeing of these entities by adhering to standards set across human rights principals, in particular standing against modern-day slavery (human trafficking, forced labour, child labour); public health control and prevention; protection and inclusion employment of most vulnerable and marginalised groups at all levels; economic development of local and global communities including diverse and inclusive supply chains; quality, safety and affordability of products; responsible, authentic marketing, and respect for consumers’ private data.
Human Capital - Addresses responsible management of a company’s human resources and assurance that these are complied with across the company’s supply chain, enacting inclusive employee policies and practices, including fair employment assessments, fair hiring, compensation and ownership, and achievement of health and safety standards, enabling workplace policy environments and organisational cultures and subcultures.
Business Model and Innovation -The onus is on profit-motivated businesses to hybridise their business model or restructure their business units to better align commercial goals with their social value creation processes. This requires innovation within the remodelling process to alter harmful characteristics of the factors of production and in redesigning final products and services through greater empathy and efficiency in the design process.
Business Leadership - This relates to responsible management of the implementation of the business model and assurance that broad financially material interests of stakeholders are understood and met, and at the same time, leadership promotes corporate citizenship delivers that adequate social value. Responsible governance and leadership requires ensuring regulatory compliance within all the above mentioned dimensions and managing risk, conflicts of interest, corrupt practices and anticompetitive behaviours associated with profit maximisation, therefore avoiding liabilities that could result in the removal of the business license to operate.
[These dimensions highlighted above have been adapted from the SASB materiality map introduced by the initiative for responsible business investment, Harvard University]
Getting to the other side - From knowledge… to application to ..sustainability …
For the ESG actions to be strategically embedded in the right balance within a company’s business strategy, the business model should ideally be deconstructed and reconstructed with a focus on quasi-hybridisation that considers the evidenced ESG needs internally and externally, feasibility of ESG approaches and partnerships, and projected impacts on the company operations, structure and the bottom line. Indeed, the bottom line and financial materiality and sustainably remains of the utmost importance if the profit-making private sector are to reward both shareholders and employees for their inputs and financially sustain actions that accelerate impacts towards achievement of the 2030 SDGs.
The learning, financial and HR outlays required to create organisational shifts and promote responsible supply chains and corporate and governance mindsets can seem enormous and prohibitive at first for most businesses, particularly, tier 1 suppliers and medium-sized buyers seeking to expand commercially. But it doesn't have to be.
There is light at the end of the tunnel: Operating globally, across 4 regions we have observed that promising ESG action, well balanced between outcomes and profits is best supported by key factors such as;
Realistic corporate self-assessment of a company's' positioning within the marketplace, their stakeholders and communities of influence, their capacities, voice and reputational risk and opportunities to make tangible business and development impact as effective corporate citizens.
Identification of all non-financial risks and a plan to mitigate these risks?
Established targets for performance and a way to measure performance against risks?
Internal systems to monitor and report on progress against plans?
Well-defined functional partnerships, as well as strategically formed ecosystems of key stakeholders and pivotal actors initiating evidence-informed, place-based collaborative approaches between corporate private sector, communities and policy makers.
Such tripartite ecosystems must be underpinned by a good mix of; clear metrics (KPIs) and measurement frameworks comprising of;
Quantitative data that is reliably collected over time, and appropriately measures what it is supposed to measure, and is timely - collected within a specific time period that measures the baseline, the outcomes and impact.
Qualitative information, particularly storytelling of needs, challenges and successes, recounted directly by those impacted positively and adversely by business activities, and development challenges internally within the workplace, and in communities - locally and globally,
Clear knowledge and descriptions of the problems and challenges to be tackled or prevented.
Getting these factors right will spread cost, effort, knowledge and learning, and produces prompt, cost-effective action and far-reaching advocacy that adds value towards engaging shareholders and customers, and identifying and sustaining long-term ESG outcomes.
Is your company or ecosystem located in UK, US, West or East Africa, or the LAC region? Are you ready to tangibly impact the SDGs locally and globally and need to strengthen stakeholder engagements? and to understand your individual and corporate strengths and opportunities that will accelerate positive impacts? If ‘yes’ to any of these questions, contact us at MWG. We’re here to help.
Sarah Adomakoh is an International Development professional and a Social Entrepreneur with over 25-years’ expertise in global development and a track record of formulating and piloting and delivering ‘first’ innovative strategies, initiatives and partnerships. Sarah is founder and principal at MarketWorks Global start-up. Her diverse and specialized business and global development experiences and productive partnerships are driven by her passion and mission to build and strengthen responsible businesses to profit with purpose that positively impacts customers, vulnerable, marginalised and 'invisible' groups and communities. Sarah has a Biochemistry undergrad Honors degree and Masters in Computer Modeling from University of London, Health Economics from Curtin University of Technology, Australia and an Executive Global MBA from the London School of Economics & Political Science