From CSR to Sustainability to ESG: powerful new strategies

The field of work and corporate orientation that started some 50 years ago as Corporate Social Responsibility (CSR), then partly morphed into Sustainability some 25 years ago, has undergone transformation in recent years and is getting some very real teeth behind it as ESG (Environment, Society, Governance). Companies that embrace ESG principles will gain some major advantages as set out below, and those that ignore it will ultimately do so at their peril. ESG involves moving from considering shareholders as the first priority, to balancing stakeholder needs, and the good news is that when this is done, shareholder returns are improved!

What is ESG?

ESG involves the assessment and improvement of actions, initiatives and results of organisations’ environmental, social and governance processes. It is common these days for large organisations to publicly report their progress in ESG, often labelled as Sustainability or ESG reports, which can run to some hundreds of pages of detail. There are a broad set of activities and areas to cover! There are many ways of cutting any ‘cake’ but most approaches are something like the following framework that I use:

1. Environmental practices and initiatives a. Lowering carbon and related emissions and pollution b. Reduced use of water and other exhaustible resources c. Preservation of natural environment, ecology and biodiversity d. Reduced climate risks e. Contribution to reduction, recycling and reusing of physical resources f. Environmentally focussed products/ services and business processes 2. Social practices and Initiatives a. Respectful treatment of stakeholders b. Contribution to community wellbeing c. Contribution to diversity and human rights 3. Governance practices and Initiatives a. Board practices b. Accountability and transparency c. Ethical standards and Business Integrity d. Executive and management structure and practices e. Governance specific processes In my research and advisory work on ESG, I also focus on the leadership aspects of ESG, including senior leadership commitment, alignment and integration with core values and strategies, and planning/ resourcing of ESG works. Finally, the results in each of these areas need to be measured, in terms of actually making a difference. It can holistically be turned into a scoring system that all stakeholders can use, for a variety of purposes.

Why should we care about ESG?

Leaders, managers and technical experts in our design, building and engineering businesses should care about ESG for many good and valid reasons. First is simply because we are human, and will all be impacted to a lesser or greater extent from environmental conditions, social conditions, and the governance outcomes of our firms. Sustainability approaches of last decade can be summarised as ‘Doing well by doing good’, because selecting and implementing a range of such practices clearly enhances profitability. ESG has ramped this up and become a major focus for professional investors, for example BlackRock (with some A$10 trillion invested) announced in 2020 that these non-financial measures will become as important as financial projections, in investment decision making. This signals a massive shift in global investment markets, and very recently we have seen rapidly rising proportions of global investments going into companies that are advanced in their ESG/ sustainability position. Also, of great interest to investors, is the increasing body of evidence that advanced ESG practices are significantly correlated with superior financial returns!

This has developed as business leaders get smarter at choosing their ESG initiatives. This works in many ways: for example according to survey research from McKinsey, benefits come significantly from enhanced corporate reputation, staff attraction and motivation, meeting societal expectations, reduced risks and costs, improved revenue and access to capital. These benefits are substantial and can occur in every and any industry, and when practices and initiatives are sensibly chosen, evidence is that these benefits come in both the short and long term. There are very good reasons as to why investors, especially professional fund managers, are moving to ESG active firms: meaning firms that actively measure, report, and improve their ESG profile. Employees are also considering the ESG of their employer. Consumers are looking harder at the companies they buy from, looking into brand reputation. And many firms are using ESG qualification in selecting their suppliers.

Regulators and institutions are also getting serious about ESG: for example the Hong Kong Stock Exchange has mandated that all listed companies must rigorously report their ESG strategies, outcomes, board oversight aspects and plans for advancement. Other markets and regulators will follow. Singapore Exchange has signalled that companies should get ESG ready for the $20 trillion dollar Asian ESG investment market. The ‘market’ for such ESG information is maturing, and while it is still early days, this is a great time for business leaders to more strongly engage all their stakeholders through this powerful mechanism.

How can businesses and their leaders best go forward?

Leaders should plan and execute their ESG approach systematically just as they would with any other business strategy or initiative. I suggest that just as with anything else significant, an ‘audit’ of the firm’s current position in all the aspects of ESG can be a great starting point, closely followed by a strategy for moving forward, from which one hangs tangible plans and goals. The best way to conduct the assessment is to examine each of the 20+ elements through a maturity/ effectiveness framework: this examines how well the ESG plans are aligned with and integrated into mainstream strategies and business operations, how deeply they are embedded in systems, metrics and even culture. While there are over 150 published methods for assessing ESG, the best approach is to examine each category using a validated scoring system, adapted from business excellence frameworks. These scores complement descriptions in sustainability reports, and provide for effective decision-making and benchmarking.

Danny Samson University of Melbourne

Professor Danny Samson conducts Consult Australia’s ‘Service Excellence and Innovation’ 2-day program each November. Comments about this article or requests for his ESG scoring framework can be sent to dansamelb@gmail.com