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:
- Health & safety
- People & culture
- Customer performance
- Community performance
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:
· Energy saving
· Emissions reductions
· Water waste reduction
· Environmental incidents
· Health & Safety
· Accidents or casualties
· Labour standards
· Gender, diversity & inclusion
· Customer satisfaction
· Shareholder engagement
· Executive compensation
· Ethical business practices
· Renewable energy
· 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.