ESG (environmental, social and corporate governance) is now a concept so central to business success that it seems extraordinary that the term was first coined less than 20 years ago, in the UN-sponsored report of 2005 entitled ‘Who cares wins’.
Of course the concept of organizations acting responsibly, in terms of the environment and broader society around them, precedes the phrase ESG. But nevertheless, the past 20 years or so have seen huge change in the significance accorded to these issues.
Consumers are more aware, investors are more discerning, and governments are more active. And there is a growing realization that in many ways ‘doing the right thing’ is good business. Strong performance against ESG indicators helps to attract and retain talent, open up new markets and opportunities due to being perceived as a trusted partner, and (obviously) avoid legal difficulties and fines.
Much has changed. But that doesn’t mean the world of ESG is now static. Far from it. Just as the world around us changes all the time (something we are acutely aware of in 2022), what is expected from an organization from an ESG perspective also changes. It is with this in mind that we look at 5 ways in which the ESG landscape is evolving, with a few ideas for making the most of these changes thrown in for good measure.
1. A growing focus on climate
It may not feel like it right now, but climate change remains the single greatest threat to human populations and our way of life around the planet. This unwelcome status is matched by the opinions of investors and consumers: of all ESG concerns, climate change regularly tops the poll as being of most importance.
Whilst investors divest from industries dependent on fossil fuels, consumers look to businesses to make real movement towards net zero in terms of carbon emissions. And the mood is impatient. Grand announcements to achieve carbon neutrality ‘in 2050’ are now taken with the skepticism they deserve. Instead, both consumers and investors want to see real, tangible action now. Take climate seriously, put the move towards net zero at the heart of your ESG efforts, and pull it forward - don’t put it off.
2. The social supply chain
ESG used to be focused primarily on the organization itself: that which we can directly control. That is changing. It is increasingly the case that any business is responsible for the entire complex web of individuals and organizations that make up the supply chain. To put that another way, if the product or service on the shelf has your name on it, your business is now perceived as responsible for every aspect of the process that got it there.
Thus it becomes necessary to carefully consider (and monitor) the ESG records of your partners and suppliers. Assuming the best is no longer enough. It is essential to carefully audit every aspect of the supply chain to ensure that governance and environmental and social impact are all in line with your own organization’s values. And it is equally important to actively monitor the supply chain to keep things that way.
3. The emergence of ‘active monitoring’
As hinted at in our last point, ESG performance is now closely related to how quickly an organization can identify and react appropriately to emerging risks. Reputation is everything, and huge amounts of careful work can be undone by a single lapse. Given this is the case, it is vitally important to proactively scan the horizon in order to spot potential challenges, and move to mitigate their effects as quickly as possible.
That’s where applying machine learning and natural language processing (NLP) to the vast amounts of data created by the global media ecosystem comes in. Products like our own RADAR detect anomalous signals in this data relevant to a wide variety of specific ESG topics, and enable the organization to drill down into articles from local, national, and international sources (over 80,000 at the latest count) to understand precisely what is happening.
By doing so, the organization is able to identify risk early and respond in a way that is both ‘the right thing to do’ and also mitigates any threat to the reputation of the organization.
4. Standardised ESG reporting
A frequent criticism of ESG efforts is that they involve fine words in the annual report but little practical action on the ground. And this perception has been compounded in the past by the fact that there is no clear, standardized way to report performance. That is changing: a number of initiatives now seek to provide transparency and visibility around ESG performance, for the benefit of investors and consumers alike.
To be fair, as yet there is no final agreement on a single standard: that is yet to come. But it is essential to keep track of this space and understand what may or may not be required in the near future. To give just two examples of activity in this area:
- The Task Force on Climate-related Financial Disclosures (TCFD) is developing a framework for climate-related disclosures (there’s a clue in the name) that enable investors and indeed any other stakeholders to understand an organization’s performance from a climate-change perspective specifically
- The International Sustainability Standards Board (ISSB) is, similarly, looking to build out ESG-related disclosure standards and guidelines, again for the benefit of investors and other third parties for whom such disclosures may be relevant.
There are other efforts beyond these, and the fact that competing approaches are in existence is a reminder that this area is not yet settled. But the direction of travel is clear, and the day of public ‘ESG ratings’ is coming. Organizations concerned with their reputation must watch this space.
5. Responsible operations from a public health perspective
Nobody wants to be reminded of the Covid pandemic (if ‘reminded’ is even the word), but the last two years saw a significant new aspect to ESG performance - certainly in the public perception - that isn’t going away. Businesses large and small had to react rapidly to changing circumstances, and the impact of those changes on society, and public health in particular, were under the microscope as never before.
Whilst the worst may be over, the growing awareness of those impacts is not going away any time soon. The “S” in ESG: social responsibility, is in focus as never before. A whole range of policies, including support for working from home, policies on vaccines and masks for employees and customers, and perhaps most importantly treating employees, partners, suppliers and others impacted by Covid with sympathy and understanding, represent a newly important aspect of ESG performance that can have a major impact on a company’s reputation.
The broader lesson should be clear. Investors, stakeholders, partners, customers and the wider public have never been more active in judging an organizations social commitments. And that will not change.