Back in the distant 1980s if you wanted to demonstrate your environmental and ethical credentials it was sufficient to shop at or purchase shares in retailer The Body Shop. The charismatic Anita Roddick, founder of the “hippy” tinged retail chain, heralded a new age of environmental concern, caring capitalism and corporate awareness that evolved into what became known as Corporate Social Responsibility (CSR). CSR was much talked about and lauded, but in reality often ended up being a lot of a hot air (excuse the pun) and often never progressed much beyond a footnote in the annual report.
Those days are gone. There is a new impetus and CSR has now morphed into ESG (Environmental, Social and Governance). Without CSR, there would be no ESG, but the two are far from interchangeable. While CSR aims to make a business accountable, ESG criteria make its efforts measurable. With CSR activities varying massively between businesses and sectors, there is a lack of comparable metrics available. ESG activity, on the other hand, is generally quantifiable to a far greater degree. ESG policies, in contrast, are criteria led and require that they be embedded in the core of a business’s strategy, rather than side lined. The power of ESG lies in its integration into a business. And its momentum is being driven by asset managers, consumers, and employees demanding transparent, purpose-led business practices that align with their own priorities.
The tobacco industry was the first to feel the heat of the early environmental and ethical concerns going mainstream as institutional investors shunned their shares. Private investors then searched for assets that were seen as beneficial to the environment and most recently renewable energy, electric vehicles and desalination are key targets. However, today, the S and G in ESG rate as highly as the E and companies that do not embed ESG into their strategies and cultures risk being ostracised by investors and, more crucially, employees and potential employees.
The Social represents diversity and inclusion, for example, and the Governance is partly the official corporate infrastructure that ensures the E and the S are not merely floaty platitudes and are properly enacted, embedded and reported The Human Times daily newsletter has reported on many examples where employees are driving the ESG agenda and the considered opinion is that employers should embrace and encourage this. A study from Marsh & McLennan concludes that by 2029, the Millennial and Gen Z generations will make up 72% of the world’s workforce, compared to 52% in 2019. These generations place greater importance on environmental and social concerns than their predecessors do – and will expect more from employers on these issues.
Rosabeth Moss Kanter, Arbuckle professor at Harvard Business School, sums it up thus: “Companies that don’t give rank-and-file workers a central role in their ESG work are making a mistake. They risk alienating values-oriented employees who question company practices, and they miss a big opportunity for employee engagement at a time when attracting and retaining talent is imperative and difficult.”
Rosabeth points to the rise in employee activism as evidence of her above conclusion. “Employees might not join unions, but they stage demonstrations, start movements, post their preferences on social media and petition for change in business practices. Democratizing ESG activity is both proactive and protective. Legions of employees who care and feel that their employers care about the same things, can bring enormous energy to help companies excel, especially given the link between ESG and long-term financial performance.”
Diversity, equity and inclusion strategist and executive coach, Lily Zheng, suggests that employees and consumers now demand even deeper and rapid change. “The killing of George Floyd has driven one of the largest protest movements in recent memory, and the widespread reactions to the standard CSR playbook suggest that old best practices may no longer work. Consumers and employees are now looking for more than Corporate Social Responsibility — they are looking for what I call Corporate Social Justice. This is a reframing of CSR that centers the focus of any initiative or program on the measurable, lived experiences of groups harmed and disadvantaged by society.”
How does all this impact on HR? Dan Peyton, managing and employment partner at McGuire Woods, makes some observations from an employment law standpoint: “The connection is that there now seems to be a moving in the qualitative analysis away from the assets and commercial activities of these businesses and towards their internal policies and operational practices. This is not a new phenomenon from an HR perspective however, the fact that suppliers, customers and investors now consider diversity issues when making decisions about who gets their business has helped to make those issues a commercial priority. If progressing the ESG agenda depends on the value the market attributes to it, the market will materially influence the pace of change.”
Other observers make the point that ESG strategies and declarations are rendered useless if companies do not build ESG metrics into their executive pay packages. Companies that do not or mystify this in any way we soon be flushed out. Willis Tower Watson comment: “We always advocate a business-first approach to executive remuneration design so that company strategy (and ESG focus) is meaningfully embedded within the executive remuneration framework to ensure alignment of required behaviours. We are already working with many companies who are leading the way in the ESG space at company level to mitigate the (often significant) current disconnect between ESG strategy and executive remuneration strategy.” The FT confirms here this is now happening. Boohoo and Volkswagen are recent examples of firms who have specifically linked executive bonuses to fixing supply chain issues and ESG targets respectively.
I will leave the last word to the late Anita Roddick who foresaw all of this: “In terms of power and influence you can forget about the church, forget politics. There is no more powerful institution in society than business... The business of business should not be about money, it should be about responsibility. It should be about public good, not private greed."
Martin Knight, Industry Slice.