Friday 8 July 2022
I recently penned a piece on the conspicuous rise in ESG ‘experts’, evaluating the claims to expertise I see springing up all over LinkedIn.
In subsequent discussions with IASeminars colleagues, there emerged a clear interest in spelling out the things often considered to account for ESG, which do not. In this article, I’ve focused on a few of the most common misrepresentations of ESG.
ESG is not the same as Corporate Responsibility/ Social Impact
Back in 2010, I started working for a pan African forestry company as the Head of Corporate Responsibility. In that job, I worked closely with Human Resources to ensure our corporate social responsibility was woven into our recruitment and retention; I used an annual donation from the company to invest in health, education, and livelihood projects around our sites of operation; I led visits by outside certification bodies and investors; and I worked with local leaders and local governments to ensure our social license to operate. When our company was publicly attacked by an outside entity in 2012, throwing us into a tailspin of disinvestment and demands from shareholders, calling into question the very pillars upon which we had built not only our corporate responsibility work but our company as a whole, things changed. From then on, my role and eventually, my title, was changed to Head of ESG. The role evolved to include investor relations; environmental, social, and governance data collection and reporting; B-Corp certification; originating and executing covenants of investment agreements; investor ESG audits; company operations; implementation of ESG action plans from investors; and otherwise using the company’s core business to elevate and improve our environmental performance, social engagement, and governance rigor.
People who lead corporate responsibility or social impact programs for companies have an exciting, commendable, and important role to play in protecting reputation and manifesting a company’s responsibility as a corporate citizen. Our Social Impact colleagues do important work to engage the company through employee volunteer programs, investment in nonprofit organizations, and communication around the social or environmental impact of a company’s work. Corporate responsibility stops short, however, from being structurally and practically woven into every piece of the business: from product / service design, fundraising, investor relations, human resources, finance, operations, and communications. If an activity is designed to improve optics or involves activities not core to the business, it is likely more corporate responsibility/ social impact rather than ESG.
ESG is not intended to police or hamstring the business
On many occasions, I’ve stood before the CFO of a portfolio company, fielding claims that ESG is merely a cost center, standing in the way of business success. And on many occasions, I’ve had the great pleasure of articulating, by example, the many and varied ways ESG can be harnessed to not only drive revenue and attract talent, but also to reduce costs. Using ESG to inform decision making allows a company to identify areas of waste, reconsider staffing and talent deployment, rewrite board codes to prevent and address corruption and conflicts of interest, isolate and attract the right investors, negotiate a lower cost of capital, and finally identify and mitigate risks.
ESG is not solely the sustainability plan or your plan to reduce carbon emissions
If ESG stopped at Green House Gas (GHG) emissions, reducing your carbon footprint, or improving your sustainability performance, there would be a great deal left to address when building a responsible company. I see many from the conservation or environmental science community leading ESG programs; and on one hand, their skill sets and ways of evaluating important problems are valuable, while on the other, there are deeply important human and structural business challenges requiring attention. It’s not enough to measure, reduce, and communicate your company’s GHG reduction plans. The challenging and interesting part of leading ESG is the art of harmonizing a company’s environmental impact with its human engagement, and its governance rigor. For example, it may be prudent to reduce vehicle transportation to and around your site of operations; but cutting transport costs without evaluating how your employees get to work could undermine your relations with staff and undermine your social license to operate.
Since ESG must be woven into the DNA of a business or an investment fund, you’ll want your ESG leaders to possess both acumen in creating science-based targets and the nuance to convince a room full of finance and operations leaders that the plan will be both prudent and beneficial to the company. ESG leaders, like all of us, will have been educated in one discipline, perhaps experienced in another; but critically, he or she must have a sound understanding of corporate finance, operations and human resources required to gain multidisciplinary support in setting ESG strategy and realizing tactics.
ESG is not ‘us’ against ‘them’
The worst thing that can happen to a company with serious ESG aspirations is for its ESG team to become ghettoized, segregated and out of touch with their finance, operations, HR, legal, and administrative colleagues. And integration of ESG leaders and responsible business orientation starts at the top of the business or fund.
The CEO brings her ESG leaders into meetings with potential and current investors; the HR leader consults the ESG team for language and program details to attract and retain the best talent – a pool increasingly intentional about where they spend their time and energy; finance leaders consult the ESG team in the production of integrated financial reports; investor relations curates investor materials involving ESG risk mitigation and value addition; marketing features the ways in which ESG leadership have improved worker conditions or crafted science-based environmental targets for the company or fund.
When teams fail to integrate and pull in the same direction, you end up with the mystifying corporate disconnect written about by Alison Taylor in her 2020 article on the corporate responsibility façade:
“When reading a corporation’s sustainability report and then comparing it to its risk disclosures—or worse, its media coverage—we might as well be reading about entirely distinct companies. Investors focused on sustainability speak of “materiality” principles, meant to sharpen our focus on the most relevant environmental, social, and governance (ESG) issues for each industry. But when an issue is “material” enough to threaten core operating models, companies routinely ignore, evade, and equivocate.”
There is no such thing as a successful ESG department that is disintegrated from the rest of the company. This is because ESG represents not only the things we do, but how we do them. ESG leaders enable operations staff to identify constraints, save money, and improve productivity. They enable investor relations and the C-suite to negotiate a lower cost of capital and access new streams of investment by virtue of demonstrable ESG performance and measurable impact.
In future articles, we’ll explore what ESG actually is, using practical examples and case studies.
 Taylor, Alison. The corporate responsibility façade is finally starting to crumble. March 4, 2020. Quartz at Work.