Environmental, social and governance (ESG) issues concern and impact every company, irrespective of where the company operates. Environmental issues range across climate change, carbon emission concerns, waste management, pollution (air and water). Social issues range across labour issues, modern slavery, under-the-table sourcing practices, product liabilities, privacy concerns, data security. Governance issues range across business ethics, corporate culture that shapes how a company functions and its organisational practices, board impact, enterprise risk framework, and the granularity of the organisation disclosures.
The term ESG was first coined in 2005 in a landmark study initiated by United Nations, titled ‹Who Cares Wins.” Environmental, Social, and Governance (ESG) refers to the three core themes in measuring the sustainability and societal impact of an investment in a company. These criteria also help in determining the future financial performance of companies.
In recent years, investing in sustainable companies has been associated with ‘doing good’ investors. ESG is no more just that or about ‘investing plus sustainability’. It is now the way of responsible investing. It is no more a ‘nice to have’ special project in a firm; it is rather a ‘must make it part of the organisational DNA’ culture and board imperative.
The COVID-19 pandemic has showcased the importance of social commitment, environmental championing, and governance values of companies. Many companies have taken up the cause of social impact, as a spontaneous response to the suffering all around. These showcase the companies’ true values and commitment to a mission.
SUSTAINABILITY AND SOCIAL LICENSE
Sustainability is specific to a company, or an industry, and a country. Companies need to measure their positive and negative impacts, identify the baselines, and disclose in a transparent and consumer-friendly manner. Regulatory requirements of such disclosures have compelled the act of disclosures, but not necessarily the spirit and details of such disclosures. To really achieve sustainability, it has to be a top-down, company-wide cultural effort.
A social licence simply refers to the acceptance of an organisation by the community in which it operates. In other words, an organisation can carry out its business, simply because of the confidence the (local) society has that it will behave well respecting all rules and traditions, with accountability, and in a socially and environmentally responsible way. The ‘social license to operate’ is made of these three elements:
• Legitimacy: the extent to which an organisation operates by the ‘rules of the game’ (the norm of the community, even if they are informal or not coded as law).
• Credibility: the organisation’s ability to provide true and detailed information to the community and fulfil all its commitments on time, without reminders.
• Trust: this aspect of highest quality of a relationship takes time and effort to nurture and sustain.
Organisations that think that social licence is something that they can ‘pay for’, end up with issues of their credibility at stake. Companies with questionable processes often try and buy such credibility by giving out community grants (in the form of social funds). This kind of transactional nature of the behaviour would break the trust that the community has with the organisation.
Even a broken relationship can be mended or healed by carefully rebuilding that trust. Trust assumes that all parties involved would nurture the relationships, based on mutual respect and highest levels of probity.
The social license of profit-making entities has to be a full-time engagement. Organisations, that champion their community initiatives, usually have their best and senior resources overseeing those initiatives. Such organisations ensure that their boards are appraised regularly of the initiatives, however small the projects could be in their balance sheet. It is the guiding principles of those initiatives which matter and not the project-cost-outlay!
Boards usually have governance expertise on business matters. At the beginning of this millennium, climate change became a global debate.
It took time for it to percolate to the corporate world as a serious topic that could impact their ‘future business as well as ‘future of business’. With ESG standards gaining momentum across stakeholder groups, Boards are discussing the following things :
• Societal changes and evolving expectations of the society
• Adapting the corporate brand promise in alignment with ESG objectives
• Various risks including Global risks, country risks, and corporate risks.
• Reputational issues
• Disruptive elements in their industry/geography
• Global momentum on ESG and expectations.
GRASSROOTS DISCUSSION
Conversations around ESG need to move out of specialist journals, multilateral institutions› annual summits, and corporate board rooms to classroom debates, panchayat discussions, and populist mass media across various languages!
A productive ESG thinking depends on building initiatives that are authentic, inclusive, actionable, and focused on driving a real-world result, not just an ESG rating or award.
ESG is not a revolution, but more a mindset evolution. This might be a good starting point for you to think of your ESG journey ahead:
• Do all your stakeholders know your ESG goals? Are all of them aligned in the mission ahead?
• How do you improve the existing ESG standards?
• Do you know of the parameters that make up your firm’s ESG score or ratings?
• How do you improve on the existing processes that impact the ESG performance of your firm?
• How do you compete with the global benchmarks?
• How strong is your social licence to operate, in the locations your firm operates and serves customers?
• How do you communicate about your ESG initiatives— both to your internal stakeholders and the external world? After all, perception is a new reality.
• You might have ‘goodness’ as a value. Is it reflected in each of the stakeholder behaviour and processes within your firm?
In this transformational journey to make the world ‘good’, every voice counts, and every positive act matters. Capital, human capital, and social capital have to come together for sustainable and impactful ESG outcomes.