Proudly sponsored by

Why all the fuss about ESG?

And why it shouldn’t be ignored.
Image: Shutterstock

You would be excused of thinking or guessing that the acronym ESG stood for employee, shareholder growth but it actually means environment, social and governance. This acronym is fast becoming the most highlighted issue in the business world following the Covid pandemic. But what is all the fuss about this issue and why has it had the spotlight focused directly on the components of ESG?

The world has functioned for many years on a ‘shareholderism’ model where the shareholder has been the primary focus of attention. Covid has highlighted the positive and negative effects of this shareholder centric model over the past 18 months. Consequently, the world has moved to a ‘stakeholderism’ model where the wider stakeholders have become the focus of attention. Sustainability of the world, countries, industries, businesses and society has taken centre stage. Business has adopted ESG as a way to ensure sustainability and value creation in the long term. ESG has of each of the following seven factors:

  1. Environmental
  2. Health & safety
  3. People & culture
  4. Customer performance
  5. Community performance
  6. Sustainability
  7. Governance

Organisations are taking a stance on ESG issues to build the measurement of this broader stakeholder focus into their corporate scorecards, strategy, culture, incentive programmes in a bid to adopt a more sustainable and inclusive approach to doing business as follows:

Environment Social Governance
Operational targets:

·      Energy saving

·      Emissions reductions

·      Water waste reduction

·      Environmental incidents

 

·      Health & Safety

·      Accidents or casualties

·      Labour standards

·      Gender, diversity & inclusion

·      Customer satisfaction

 

·      Compliance

·      Disclosure

·      Shareholder engagement

·      Executive compensation

·      Ethical business practices

Stakeholder targets:

·      Renewable energy

·      Conservation

·      Climate Change initiatives

·      Carbon footprint

 

 

·      Community engagement & investment

·      Upskilling and training

·      Company culture

 

·      Stakeholder engagement

·      Wider shareholder engagement

 

But why is ESG important to business?

The world celebrated positive environmental and social improvements brought about by reduced economic activity when business was slowed to one third during the initial lockdowns because of Covid around the world. Examples of these were dolphins swimming back into the canals in Venice, wild bears being sighted again near cities and towns in Canada, stars being seen in cities around the world where pollution had blanked them out for years or decades, flourishing numbers of birds and wildlife, reclamation of immaculate beaches  around the world, improved surface water quality, city dwellers being able to breathe fresh unpolluted air, lower sound pollution and CO2 emissions, more quality time with family, developing new hobbies and increased learning, more physical activity and better eating habits, and better quality of sleep.

These “Covid-stimulated” events and the mounting pressure from proxy advisors, shareholders, and regulators, increased the motivation for companies to drive a more ESG-integrated business from within. Companies are having to make ESG part of their strategy and DNA to ensure sustainability. Employees are asking companies why they should work for them, customers are asking why they should by from them, suppliers are asking why they should supply them and not someone else, communities are asking why they should allow the company to exist in their environment, society is asking companies how they do business and companies are asking how they should be behaving.

Apart from the obvious external benefits to the environment and society at large listed above, there are a number of organisational benefits that make ensuring ESG compliance a strategic imperative as follows:

  • Customer retention
  • Fewer regulatory and legal compliance interventions
  • Positioning as an employer of choice
  • Enhanced employee value propositions ensuring retention
  • Positive impact on business reputation and brand
  • Attractive to investors
  • Create / maintain good social standing
  • Stable and consistent suppliers and supply chain
  • Enhanced employee health and wellness
  • Increased innovation through diversity, equity and inclusion
  • Prosperous communities

How are businesses then driving ESG to become part of their sustainable strategy and DNA? Including ESG measures in executive incentive plans encourages a sense of accountability beyond just setting organisation-centric goals. There has been a step change in organisations including ESG measures in their incentive plans around the world (particularly since the pandemic). While most of these measures currently populate short-term incentive plans (20%-30% of STI measures), stakeholder measures are now starting to appear in long-term incentives (LTI) as well (10%-20% of LTI measures).

This differs significantly by region where Australia leads in the use of stakeholder measures in incentives with an 81% prevalence, whereas the US lags Australia and Europe at around 60%. The prevalence of stakeholder measures in incentives also differs significantly by industry sector. Utilities, financial services, energy, and materials companies are the most frequent users of stakeholder measures, whereas information technology and consumer discretionary companies are the least frequent users of stakeholder measures.

The business landscape is changing exponentially and companies will have to scan the environment continually and adapt with agility to a growing stakeholder-centric world to remain sustainable and relevant. Companies that ignore the ESG movement will do so at their peril and probably not survive to tell their story in the changing world of work.

Bryden Morton is executive director and Chris Blair CEO at 21st Century.

COMMENTS   8

Sort by:
  • Oldest first
  • Newest first
  • Top voted

You must be signed in and an Insider Gold subscriber to comment.

SUBSCRIBE NOW SIGN IN

That ESG gets a mention is due to the fact that existing environmental, societal and governance rules and laws are not implemented and have been eroded.

The irony is that the very corporates that are trying to claim ESG points are the very same ones that for decades or, in some cases, over hundred years have lobbied against and circumnavigated ESG laws.

Corporate and Govt hypocrisy.

It is almost like organisations and the people within them and the environment they operate in change. What a strange concept.

Because the socialist’s and the greenies and the do gooders wants it?

Consumers use the profit margin to incentivize entrepreneurs to act in a specific way, and for investors to back those entrepreneurs, for the ultimate benefit of the consumers.

Investors and entrepreneurs are punished with bankruptcy if they fail to deliver on the whims and fancies of the consumers. Profit margin drives competition, and competition drives efficiency. The quest for efficiency forces entrepreneurs to optimize their strategies. The entire market system acts in the best interests of the consumer, who enjoys the freedom of choice and an abundance of alternatives. The market system rewards all participants fairly, but the consumer reaps the greatest rewards because he receives the best product at the best price.

If the consumer really wanted ESG benefits, he would demand it by putting his money where his mouth is. Think about the thriving market for free-roaming, grass-fed, antibiotic-free, stress-free, halaal, and kosher products.

The market system is the ultimate democracy. People regularly vote with their money. Entrepreneurs will immediately, and voluntarily fall over their feet to satisfy the true needs of consumers. The consumer does not need a politician to interfere. Politics cannot allow competition though, therefore, politicians always want to insert themselves between the entrepreneur and the consumer, for the benefit of politicians.

When an alternative authority, other than the consumer himself, starts to make demands regarding various operating issues, it infringes directly on the rights, and freedom of choice of the consumer. Socialists who have never owned, or ran a competitive business themselves, believe that they are prescribing actions and strategies to business owners when they demand ESG requirements by law. This is a shortsighted belief because they are ultimately restricting the alternatives and the price benefits for consumers. Every single requirement that does not lower the cost for the consumer, plunders the consumer.

That brings us to the point. Either we have a free society where consumers are spoilt for choice and have rights, or we have a command economy where the needs and freedoms of consumers are trampled upon. There is no middle ground. A female is either pregnant, or she is not.

@Sensei

This is too extreme a view,that can only exist in the idealistic confines of an academic textbook.

“Life” and “living it”, is SELDOM a binary choice ONLY between glaring polar opposites.

Success is instead usually found in crafting practical and intelligent compromise somewhere BETWEEN these extremes.

The notion that it’s INTRINSICALLY SAFE to allow Capitalism (and rabid Capitalists) to have completely unfettered reign (a monopoly prescribing only THEIR exclusive “world-view”) over the lives of the rest of society is plain DANGEROUS!

Let me be clear.

Communism is now a well-proven failed concept. And a huge problem now in SA (and elsewhere) is that this message still to be absorbed by many adherents of that faith.

My point is, it’s a huge mistake to think that the “failure of communism” necessarily means that EVERYTHING about Capitalism is now “good”.

It most certainly isn’t!

The point is, NOBODY with a monopoly can be trusted!

What do you think the ultimate desire of every successful “businessman” is for his business???

To establish a MONOPOLY – where HIS business ALONE (and naturally HIS ideas and his – NOT your – worldview) reign supreme. And most importantly,remain unchallenged.

Of course, the immediate counter-argument by the academics is that monopolies positively INVITE competition, which then will (supposedly!) even everything out, and then every “little citizen” will be gloriously happy again.

EXCEPT for one small thing.

Since time imemmorial, that is NEVER how power-hungry humans have reacted to “opportunity”.

So, if you can’t create a monopoly? You conspire with your competitors to form an Oligolopy instead. This only a temporary association until you finally figure out how to do your competitors in!

History is well-documented with the excesses that powerful people (especially including Capitalists, Sensei!) get up to when they are unfettered.

It’s a huge mistake to advocate that Capitalists are somehow more saintly than others. And that “the Capitalist system” has this wonderfully effective self-redressing function that actually works.

Because… “actually” the Capitalist feedback loop – by itself – does NOT work all that well in practice! Too slow oftentimes, and many times too easily over-ridden by smart operators taking advantage of customer apathy.

One has only to look at the way the “Capitalist” LEGAL profession has behaved. And CONTINUES to behave.

Textbook example of bad Capitalism in action, Sensei!

Unfortunately, the “change agents” of society ARE the POLITICIANS. That is their prescribed role – to bring actual change in effect in society.

In my book, “Businessmen” are just as duplicitous and untrustworthy as Politicians.

Both these “characters” need CONSTANT supervision and constant auditing on performance and ethical behaviour.

And that supervision must be done by “society”.

Where do you draw the line though? Once you open the door to allow people who do not own property, to dictate to property owners how they should employ their property for the benefit of those who do not own property, everybody who does not own property will monetize their position of power for personal gain. State intervention in the business environment is an infringement on property rights. Infringements on property rights grow progressively and are never stationary. If you have the power to regulate, why stop with one regulation if you can benefit from 10 more regulations?

“The person who profits from this law will complain bitterly, defending his acquired rights. He will claim that the state is obligated to protected and encourage his particular industry; that this procedure enriches the state because the protected industry is thus able to spend more and to pay higher wages to the poor workingmen.
Do not listen to this sophistry by vested interests. The acceptance of these arguments will build legal plunder into a whole system. In fact, this has already occurred. The present-day delusion is an attempt to enrich everyone at the expense of everyone else; to make plunder universal under the pretense of organizing it.” ― Frédéric Bastiat, The Law

“It is true that the virtues which are less esteemed and practiced now–independence, self-reliance, and the willingness to bear risks, the readiness to back one’s own conviction against a majority, and the willingness to voluntary cooperation with one’s neighbors–are essentially those on which the of an individualist society rests. Collectivism has nothing to put in their place, and in so far as it already has destroyed then it has left a void filled by nothing but the demand for obedience and the compulsion of the individual to what is collectively decided to be good.”
― Friedrich August von Hayek, The Road to Serfdom

Because asset gatherers need to look relevant.

First it was “alpha” until they failed to beat benchmarks.

Now its ESG where outsized returns will be made by doing good. Even better story if artificial intelligence (AI) is integrated.

I really am quite surprised by the generally negative commentary here so far.

ESG is not a maybe or a whim… It’s (environmentally) quite literally the biggest thing we need to worry about in our collective future.

I don’t see things like excessive droughts, more flooding and hurricanes as great news! And the fact that finance/business is now making it a priority is a massive plus IMO.
The more we can ensure money is allocated to better solutions, while still giving returns to owners of capital, the better.

The alternative is either a terrible world to live in or massive authoritarian intervention (or probably both).

And generally speaking – the “E” only works when you include the “SG” part too.

End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR
BTC / USD

Podcasts

Instrument Details  

You do not have any portfolios, please create one here.
You do not have an alert portfolio, please create one here.
INSIDER SUBSCRIPTION APP VIDEOS RADIO / LISTEN LIVE SHOP OFFERS WEBINARS NEWSLETTERS TRENDING

Follow us: