ESG is now in every corporate conversation – and it should be
The mainstreaming of ESG is a welcome development for those of us who have been championing the corporate responsibility to respect human rights for a decade or more. It is especially welcome for those most at risk of harm.
At this week’s AFR ESG Summit, while decarbonisation continues to dominate the conversation, integrating and expanding the constituent components of “environment social governance” will drive deeper resilience and ultimately regeneration. Social must get more than a cursory look-in. John Elkington, an ESG luminary, challenged the Summit by asking are we at ‘ESG peak’? There was much definitional debate – are we ‘beyond ESG’? Should we preference more holistic terminology like sustainability? Do we need one single, shared, regulated definition of ESG?
Right now practical responses to social risks and opportunities in the ESG millieu require four things.
First, begin with understanding that taking stand-alone positions on E or S or G will not accommodate nuanced management of risk or innovative pursuit of opportunities. Second, to be fit for purpose in the immediate future, responding to emerging regulatory change and investor expectations means being in front of the regulatory curve not behind it. Third, improving the quality of your data – both quantitative and qualitative – is at the heart of having a ‘trusted’ ESG approach. Fourth, operating in this new economy, where ESG is increasingly part of business-as-usual, requires the intentional use of purpose to evolve your corporate culture and determine the contribution you will make as part of your core business.
Moving from commitments to action requires each of these elements to be present.
Begin with understanding that there is no such thing as discrete E – S – G responses
Let’s start with an area of focus for most. For example, if energy transition and net zero are the current primary drivers of your ESG agenda, beyond the clear environmental and climate imperative, there are significant social risks and opportunities for you to understand and embrace.
Understand how your organisation’s net zero strategy presents a risk to people: without looking for the intersections you may achieve net zero in a way that has significant negative social and human rights impacts.
These risks emerge from all sorts of areas. For example, your transition strategy may rely on solar. Polysilicon, one of the major inputs into solar panel manufacturing, is overwhelming sourced in western China and specifically Xinjiang. This intersection means the risk of Uyghur slave labour finding its way into the infrastructure for solar produced energy is very high.
The volume of copper needed to make the energy transition is enormous. The world’s largest undeveloped copper deposits largely sit under Indigenous lands from Canada to the Philippines. The rapid development of those deposits needs entirely new forms of Indigenous control and governance, if they are to be done in a way that doesn’t multiply Juukan Gorges and widespread First Nations resistance. These take time to develop and agree. Tension abounds and if we choose rapid development in the absence of preventing the social impacts, let alone respecting First Nations rights, including at times the very existence of First Nations cultures.
Communities which revolve around coal generation are about to face the closure of assets, loss of livelihoods and an uncertain future. Managing the transition justly by understanding, planning for and responding to the social impacts of closure is critical. Listening to these stakeholders, planning with and for them, and charting that future together is the best way to maintain and build social licence and the political permission so sorely needed for the rapid social transformation decarbonisation requires.
At the Summit, Mike Cannon-Brookes shared that in preparation for his bid to prevent the AGL demerger, he called all of the union leaders in affected communities like the Hunter Valley. According to Cannon-Brookes, not one of those leaders thinks that coal will still be operational in 2040 but, crucially, they do want a plan. He reported that not a single union official with whom he spoke had been consulted by AGL on the plan for transition. At the heart of this story lies an obvious central tenant of the ESG agenda: involve people in the process. This must mean facilitating spaces where the voices of the vulnerable reach and influence people in power. In this case, how we get to net zero has to be as important as achieving net zero.
Emerging regulatory change and investor expectations will shape the ESG landscape
Regulation and other sticks are tightening the compliance imperative for companies, but also bringing with them a level playing field to drive certainty into capital markets and opportunity led-responses. This week ASIC launched greenwashing guidance and the ACCC made a clear call to action at the Summit – that they will eminently move to enforcement to ensure that consumers can trust companies’ ESG claims and the credibility of the products and services they offer with ESG credentials. Interestingly, APRA also indicated the importance of Australia’s regulatory alignment with international standards, lest Australian business be ignored because we don’t fit into the international paradigm.
The C-suites of corporations with multi-jurisdictional footprints are already well across the regulatory requirements forcing deeper and quicker ESG hygiene, particularly aligning with environmental and climate change reporting as well as the introduction of mandatory human rights due diligence. Concerns are no longer just the domain of heads of sustainability. Chief Financial Officers, who participated in our 30 Voices on 2030 on the ESG Revolution research, believe that environmental, social and governance priorities will be important to their organisation in 2030. There was a striking uptick in the perceived future importance of social – with 94 percent of them saying the social in ESG was important, with governance at 100 percent and environment at 88 percent.
Other drivers for those CFOs are investors and capital markets. Investors and other capital market actors, like debt providers, are intensify their questioning and thirst for good ESG information. They want to know not just if your social risks have been identified but how you’ve done that. They also want to know what is coming in terms of how you measure your social performance including your management of social risks and how you are measuring positive social impacts. This in turn is driving heightened emphasis on data. Designing governance responses, including the monitoring and evaluation frameworks you establish to measure and report on ESG, must have an eye on being fit for purpose for the immediate future and long-term need. As one Summit panelist presciently mused, this space is dynamic – what was best practice a mere three years ago is already out of date.
Data, data, data: measuring to report is at the heart of having a ‘trusted’ ESG approach
An assumption persists that social risk and opportunity aren’t easy to measure and that it isn’t clear what the value is to business from action on the S in ESG. In our conversations with boards, there remains an emphasis on quantitative measures (such as, how many of our suppliers have you risk assessed) and only an emerging understanding of how qualitative data can support both better risk management and drive change (like the quality of supplier engagement, root cause analysis and accountability metrics).
Some of the leading work around social impact measurement is being catalysed by investors through the Global Impact Investing Network, including common indicators. On the social side this work has borrowed from our community development colleagues and their work seeking to understand and measure the impact of their community interventions. There is also the contribution that integrated reporting is making in terms of explicating the social capital.
There is significant work on social performance measurement underway. The shift from outputs to outcomes and impact measurement within corporate contexts is now part of the early while rapid engagement of CFOs or others charged with governance in understanding the options around measures.
Unquestionably, as markets, consumers and communities seek more and more information on which to base decisions and drive campaigns, confidence will be found in more transparency and information that tells the story of change and improvement – including where things are not yet going well. As Cannon-Brookes called it “we don’t cheat” – it shouldn’t be a bar that organisations need to aim to cross, but credible targets and information on progress and effectiveness are the necessary starting points for trust.
The emerging new economy
The intersection of ESG and business requires us to ask some philosophical questions. Do we want to live in an economy supported by a society, or a society supported by an economy (with thanks to Eva Cox)?
In this context, all capital market actors need to ask themselves what is their role in serving society – what is their purpose? This was a question before the global pandemic when the primary framing was trust. Trust in business was at an all-time low pre-pandemic, yet as business responded during it, trust has increased. Simon Griffiths, CEO of Who Gives a Crap, appropriately encouraged the Summit to consider cataclysmic social impacts, like the destruction of the Juukan Gorge, as something that goes to the heart of corporate culture – in fact, the challenges faced by Rio Tinto went beyond governance, to the demonstrable need of having purpose at the front and centre of your culture.
Elkington also challenged the Summit that we need to build a new economy that is fit for purpose, inclusive and honest. He said, ‘responsibility as an agenda is not going away but it will evolve very rapidly.’
This mainstreaming of ESG is in part a broader response of capital markets as different stakeholders – consumers, communities, polities and more – deeply question the relationship between society and our economy.
What is next?
We face extraordinary challenges and opportunities when we look at the current state of our planet, our nature and our global community. The mainstreaming of ESG cannot silo the E from the S and the G. As the conversation persists lopsidedly towards solving for the ‘E’ we need to embrace the challenges and complexity of bringing the ‘S’ into our analysis and response right now. To not do so risks hitting net zero but moving even further away from zero harm.