In the past, large corporations could largely go about their business, creating profit and satisfying their shareholders, unhindered, but in today's world, businesses are being buffeted by world events as never before (latterly: climate change, a global pandemic and armed conflict). Both governments and the private sector are increasingly expected to act in accordance with the growing consensus, particularly in the west, about what constitutes sound business practice in this environment. International businesses are often now seen, not simply as wealth creators and providers of jobs, but as 'citizens' with ethical responsibilities. If a business wants to recruit and retain talent, this requires more than just a good customer-facing brand. Potential employees (especially millennials and generation Z) are choosy about whether to associate themselves with a business. All this means that businesses are increasingly expected to work towards real, measurable ethical credentials: in other words 'ESG'
What is ESG and why does it matter?
What is ESG?
Environmental, Social, and Corporate Governance (ESG) refers to evaluating business operations, not specifically from a financial viewpoint but from an environmental, social and governance perspective. But it's worth noting that ESG is not necessarily about businesses making ethical choices that make them less profitable. Governments sometimes find ways to encourage businesses to make choices that are good for them from a financial perspective, but also further the broader aims of reducing the impact of climate change (a 'win-win'). For example, in the UK, a law has recently come into force to encourages pension schemes to make sounder ethical investment choices by requiring trustees to consider the environmental impact of the businesses they invest in. The idea is that this should nudge pension schemes in the direction of more sustainable choices, whilst hopefully still enabling them to make profitable investments.
What does it cover?
The 'E' for environmental criteria deals with a company's impact on the world around it; the 'S' for social standards is about the company's impact on the community and their employees, such as its emphasis on diversity and its values; and the 'G' for governance relates how the company is managed and the principals it adheres to.
Why does it matter?
ESG matters for various reasons: it's important in terms of the sustainability of the business; it matters for a company's public profile; it impacts on how it can recruit and retain talent; and on how well it can respond to external pressures of all kinds. But ESG is also increasingly used by socially conscious investors to select investments - and that means it is inextricably linked to the bottom line.
Studies reveal that conforming to ESG standards benefits a company in more ways than one and there is a positive correlation between corporate financial performance and ESG in the longer term. 1 Aside from financial performance, conforming to ESG standards can boost a company's reputation, thus its customer pool and the trust in the organisation. In 2020, the Edelman Trust Barometer revealed that ethical drivers (76%) were three times greater than competence (24%) in terms of people's trust in a company.2 In that survey, integrity, dependability, and a positive impact on society were used to define the ethical dimensions of a company.
Further, employees are drawn towards ethical companies. IBM reported that for 41% of employees, employer ethics and values are key engagement factors.3 Good employer branding is vital in this new world and impacts on the kind of branding employers need to do to attract and retain talent. For example, for many years, Apple has inspired potential employees by its corporate ethos and the elegance of its design. But today, businesses need to go even further - an essential part of a good employer brand these days is wrapped up in ethical credentials. To be one of the sought-after brands of the future, an ethical strategy encompassing employee-issues such as work-life balance, diversity and health, along with good governance, environmental sustainability and company accreditation – are all part of the toolkit employers need.
And as mentioned, more and more investors are using ESG standards to inform their investments .4 And according to the Edelman Trust Trust Barometer Special Report: Institutional Investors, "88% of institutional investors subject ESG to the same scrutiny as operational and financial considerations." This is only logical, as a company's reputation and its ESG activities interact closely. A scandal can cost a lot of money in fines or decreases in market value. Some famous examples are the 2010 Deepwater oil spill, which cost BP a USD 53.8 billion pre-tax charge5 ; Volkswagen's 2015 emissions scandal, which cost the company more than GDP 25 billion6 ; and Facebook's privacy breaches that caused billions of dollars in market value decreases.7
Where to start on the ESG journey
International organisations working in the ESG space
There is a good deal of infrastructure to help businesses work out what principles they should adhere to and how to effect the changes they need to make. The most significant of these are the United Nation's 17 Sustainable Development Goals (SDGs), which is the core of the 2030 Agenda for Sustainable Development, adopted in 2015. The SDGs are widely known and form the aims of many international institutions that support and promote ESG practices.
It is also worth being aware of the UN Global Compact, a voluntary initiative set up in 2000 "based on CEO commitments to implement universal sustainability principles and to take steps to support UN goals." It was created with assistance from a number of UN organisations, such as the United Nations Environment Programme Finance Initiative (UNEP FI) and encompasses 10 basic principles in the areas of human rights, labour, the environment and anti-corruption. It says that:
"by incorporating the Ten Principles of the UN Global Compact into strategies, policies and procedures, and establishing a culture of integrity, companies are not only upholding their basic responsibilities to people and planet, but also setting the stage for long-term success."
Following on from this, the OECD Guidelines for Multinational Enterprises, which were first adopted back in 1976 and last updated in 2011, contain detailed provisions covering human rights, employment and industrial relations, environment, combatting bribery & extortion, consumer interests, science and technology, competition and taxation. These are addressed to both governments and international enterprises. The aim of them is to:
"encourage the positive contributions that multinational enterprises can make to economic, environmental and social progress and to minimise the difficulties to which their various operations may give rise."
The OECD also provides other guidance related to ESG, including the OECD Due Diligence Guidance for Responsible Business Conduct, and the G20/OECD Principles of Corporate Governance.
There are other sets of standards too, not least those espoused by the International Labour Organisation, the ILO, providing international labour standards, some of which are similar to the UN and OECD standards in many respects.
There is also the International Organisation for Standardisation, 'ISO'. Founded in 1946, the ISO is an independent non-governmental international organisation that develops International standards. They have issued thousands of standards touching on all 17 of the UN Sustainable Development Goals. They also have some more specific ESG-related guidance such as ISO 26000 Social Responsibility and ISO 37000:2021 Governance of Organisations.
To help businesses set up reporting systems, there are some very well-established standard-reporting organisations that companies can use to report their progress, of which the Global Reporting Initiative (GRI) is a large player. This is a not-for-profit organisation, structured within the ambit of the UN and funded by governments, along with other public bodies. It has been around in some form since 1997 and now has a comprehensive modular reporting framework, covering all aspects of employment, as well as environmental reporting etc. They have one of the most widely-known and used sets of standards for sustainability reporting. Over 500 organisations from over 70 countries are part of the GRI Community and this is growing.
There is also the International Financial Reporting Standards (IFRS). It is a non-profit, public interest organisation that aims to develop a single set of enforceable and globally accepted accounting and sustainability disclosure standards.
Another route is accreditation. The idea of 'B Corps' started in the US but now 60% of B Corps are outside the country. To qualify as a B Corp, a business has to score 80 or more on the 'B impact assessment' and pass a legal test to do with how the company is set up. The testing organisation is set up as not-for-profit, and each B Corp is: "a company that aims to redefine success in business - it looks at the positive impact on people and on planet as well as on profit."
In short, many respectable leading international organisations recommend and offer standards and guidelines on ESG. But how about the law?
Top 7 for ethical expectation:
LAWYERS IN 25 COUNTRIES TOLD US WHAT LEVEL OF ETHICAL CONDUCT THEIR BUSINESES ARE EXPECTED TO SHOW. COUNTRIES WITH THE HIGHEST EXPECTATIONS WERE THESE:
1 Tensie Whelan, Ulrich Atz, Tracy Van Holt and Casey Clark, ESG and Financial Performance: Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015 – 2020, https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-RAM_ ESG-Paper_2021%20Rev_0.pdf
2 Edelman Trust Barometer 2020, https://www.edelman.com/sites/g/files/aatuss191/files/2020-01/2020%20Edelman%20Trust%20Barometer%20Global%20Report.pdf
3 IBM, What employees expect in 2021, https://www.ibm.com/downloads/cas/5BWJYEKZ
4 Investopedia, Demand for ESG Investments Soars Emerging From COVID-19 Pandemic, https://www.investopedia.com/demand-for-esg-investments-soars-emerging-from-covid-19-pandemic-5193532#citation-1;
5 Reuters, BP reaches $18.7 billion settlement over deadly 2010 spill, 2015, https://www.reuters.com/article/us-bp-gulfmexico-settlement/bp-reaches-18-7-billion-settlement-over-deadly-2010-spill-idUSKCN0PC1BW20150702
6. The Guardian, Dieselgate: British car buyers' claim against VW reaches high court, https://www.theguardian.com/business/2021/dec/05/dieselgate-british-car-buyers-claim-vw-reaches-high-court
7 Financial Times, Facebook privacy breach, https://www.ft.com/content/87184c40-2cfe-11e8-9b4b-bc4b9f08f381 https://www.ohchr.org/en/hrbodies/hrc/wgtranscorp/pages/igwgontnc.aspx
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