The six guiding principles of ESG for business leaders
ESG issues have become increasingly prominent as businesses chart a route towards responsible capitalism. In order to remain relevant, many organisations may have no choice but to change tack, as investment firms step up their response to public scrutiny by setting their sights on sustainable opportunities.
But what steps do leaders need to take to ensure the successful implementation of ESG policies in the future? Research and collaborative work with Headspring partners suggest six guiding principles:
- Justification to shareholders
- Brand alignment
- Measurable impact
- Engagement of all staff
- Honest about trade-offs
- Bias for action
1. Justification to Shareholders
Responsible business is fundamentally an ethical issue. It has grown in importance as consumers and society as a whole have become insistent on more comprehensive corporate responsibility.
It remains necessary, though perhaps less fashionable, to remember that business needs to serve investors’ interests. Sustainable growth policies must have two anchors: what’s good for the company; and what’s good for society. These do not need to compete.
To some, this equation may appear to be unresolvable. How does purposeful business align with the pursuit of profit? The answer lies in understanding that these twin targets need not conflict and can actually be aligned: what makes good business sense can also serve society, although what this looks like will be different for each company.
Shareholders are entrusting managers to use assets sustainably, not just to generate the next quarter’s returns. Profit, well earned, can itself be a social good; profit and purpose can be genuinely and productively aligned.
The impression that multiple stakeholders’ interests are at odds with shareholders’ concerns is often based on a difference in view: short term gain versus long term reward. BlackRock CEO Larry Fink identified this when he declared that companies prioritising long-term thinking over short-term gains would be ‘better able to navigate this crisis and its aftermath.’
It is a trend endorsed by Vlatka Hlupic, one of the world’s leading authorities on leadership and organisational transformation, and author of The Management Shift and Humane Capital.
She argues that the traditional paradigm which pits business against broader wellbeing is outmoded and that by focusing on stakeholder value, leaders can automatically return better results for shareholders as well.
Hlupic’s academic and professional work confirms that companies serving multi-stakeholder development, embracing an advanced mindset and collaborative culture, see more notable innovation and higher performance.
In our study, 85% of senior HR and L&D leaders feel that ESG should be a priority. Up till now, environment and governance issues have been the primary focus of ESG in many corporations. Green bonds and similar instruments make it easier for capital to flow towards environmental goals. Measurement and standardisation are also more straightforward than in social investments.
As the voices of social movements in times of crisis grow, so perhaps should the degree to which shareholders prioritise the views of company stakeholders. When employees now think about ‘responsible business’ they may be thinking more than ever of social impact.
How much shareholders pay attention could directly influence employee wellbeing and positive company culture – both big concerns for HR and L&D leaders.
Alex Edmans is Professor of Finance at London Business School and author of the norm-challenging book Grow the Pie: How Great Companies Deliver Both Purpose and Profit.
Speaking to Headspring, Alex resists the zero-sum, or ‘pie-splitting’ approach that pervades corporate decision-making and sets business and society at loggerheads. Instead, he argues that a ‘pie-growing’ mentality – one which achieves profits by focusing on the betterment of multiple stakeholders – leads to gains for investors, employees and communities.
Actions in a crisis are a test of an organisation’s purpose. The corporate conversation is already shifting as investors pay more attention to how businesses tackle social issues and how they view labour. People will expect firms to behave differently, to put sustainability and social stability at the top of their agenda.
2. Brand Alignment
A company’s ESG activities must be materially aligned with its brand and commercial activities and, for optimal impact, ought to be aligned with its core values. By demonstrating correlation and coherence with the company (and, perhaps, even with its purpose) policies will be more powerful and resonant.
Ensuring relevance to the brand helps protect and enhance the company’s reputation, avoids charges of hypocrisy, galvanises stakeholder support, and provides the credibility for a vision of social change.
One of the reputational challenges that purposeled businesses face is that ‘responsible business’ is sometimes associated with cynical CSR or CSI initiatives around ‘social washing’. These types of programmes have always been motivated, at least in part, by building positive brand goodwill.
With consumers and stakeholders becoming more conscious of business responsibility, and more willing to express their views, brand alignment is probably now more important than ever. This may explain why our survey respondents believed the number-one action their company should include in its ESG activities was to encourage employees to support charitable projects in the company’s name.
Ranked second is winning over government and public support in key markets – a blend of commercial and PR motivation.
Joe DiVanna, consultant and Managing Director of Maris Strategies, a Cambridge innovation research and advisory think-tank for global organisations, feels companies must not underestimate the emotional impact of the Covid crisis.
He regards consumers as being ‘at the coal face of human change’. They could in theory collectively force CEOs to take a fresh approach because they have become more aware of being part of a global society, and may demand that companies demonstrate more compassion.
3. Measurable Impact
Companies need to find effective ways to track these critical aspects as they make decisions in
prioritising sustainable commitments:
- The benefits to the company (financial and non- financial, such as talent recruitment and retention)
- The costs to the company (direct cost and opportunity cost, such as staff time spent on ESG projects)
- The benefits to society
- The costs to society
All four need to be measurable.
In many cases, the tools may be blunt or not-yetdeveloped, but without some measure of impact, ESG activities could be pointless. It is hard to pin down useful data on social impact, which lags behind environment and governance issues in prominence. This has led to woolly statements that vaguely encompass matters relating to the workforce and community.
More than half of those who participated in the survey (57%) feel that one of the most significant challenges facing effective ESG implementation is that there are no effective ways to measure impact.
A growing array of benchmarks can provide some measurement, from internal job-satisfaction surveys and board-diversity quotas to air and water pollution monitoring. Where no standard industry benchmarks exist, companies should strive to develop them. Doing so would not only add credibility to ESG initiatives but would underpin ESG reporting systems, adding quantifiable substance to purpose-led actions.
Silvia Pavoni, Economics Editor at The Banker, believes in the need for reliable metrics: She argues that much of the data is already available and that the creation of a standardised framework is an essential building block for a more inclusive kind of capitalism.
However, Alex Edmans reminds us that while calculating outcomes may be helpful to justify a purpose-led agenda, it is also essential for leaders to be courageous and to trust their convictions and principles.
Although analysis helps people to feel more comfortable when making decisions, it can close the door to creativity, innovation and growth. Like Hlupic, Edmans asserts that there is an evidencebased connection between profitability and the concept of doing good: profitable purpose.
With the right level of commitment, big business can create a reporting framework that promotes sustainable value across the world.
4. Engagement of all staff
As organisations adopt ESG policies, there has been a tendency to stratify their communication, motivation and implementation at different management levels.
Joe DiVanna suggests that many sustainable growth policies are set at a very senior level and left to trickle down. As they do so, they become increasingly open to interpretation, which results in low alignment.
Junior managers sometimes have only peripheral input or involvement in execution. At other times, the opposite is the case. Employees bring passion and enthusiasm for direct action but can have widely differing ideas about how the company can improve society. When they fail to win support and direction, the passion dies.
The challenge, therefore, lies in focusing diffuse enthusiasm into a coherent ‘house view’. This is vital, as on-the-ground actions will vary according to division, market or corporate function, and a clear set of principles allows staff to execute locally with group energy.
Providing unambiguous direction is vital. The better-aligned employees are, the clearer they will be about how they can affect personal change. It is not always possible to involve everyone, but the more extensive the engagement, the more significant the impact.
Our survey shows that the disconnect begins in senior leadership – 28% of respondents do not understand, or do not fully understand, their company’s ESG policies.
In addition, more than half of the participants surveyed feel that notable challenges facing effective ESG implementation are that ESG approaches do not involve ordinary employees (54%) and that there is a lack of engagement from senior management (56%).
These sentiments speak to the need for engagement of all staff, rather than siloed departments. Joe DiVanna expressed something similar in a recent Headspring ESG panel discussion on financial services.
“They have to be agile enough to figure out how their organisation needs to change. They also have to trust that employees will do the right thing.”
DiVanna sees the challenge of engaging staff as one of the most significant – especially for traditional leaders who often view their staff as a commodity rather than a resource. Pushing decisions back to teams who have the skills and talent to innovate can have profound effects on businesses. Many hope that the flexible working arrangements that have been a signature of coronavirus lockdown business will continue.
Silvia Pavoni views the shift in working arrangements over the lockdown period as an opportunity to push forward with diversity policies, as more flexible business practices can recalibrate the gender balance within organisations. Perhaps it also offers companies the chance to think afresh about how employee and team performance is measured – maybe it is time to ditch outdated KPIs and create new metrics that measure value as well as profits.
5. Honesty about trade-offs
One of the trickier aspects of developing an ESG policy is recognising that positive contributions regularly produce some negative consequences, often in the short term. There may be loud complaints. In some high-profile cases where companies are the object of media criticism and public charges of hypocrisy, there is a danger that introducing an ESG policy can undermine commitment to other projects.
Being honest about trade-offs is not a case of using pros and cons to decide between pursuing profit or purpose, or between policies that prioritise either shareholders or stakeholders.
It is about accepting the negative implications – however small – of pursuing ESG goals and needing to be transparent and realistic about these, without letting them paralyse the company into inaction.
Rather than trying to hide the negative consequences, however large or small, companies should understand them, measure them, and present them in the context of the broader good.
Leaders need to be honest about trade-offs; trying to please everyone could lead to a waste of resources and depletion of trust in the true value of sustainability (amongst shareholders as well as other stakeholders).
Perhaps the most significant trade-off relates to timeframes. Companies typically want the benefits to arise in the short-term and the costs to be spread over the long-term. The shift towards electric vehicles may provide swift environmental benefits, with the costs accruing later – the difficulty of disposing of lithium batteries and the excessive strain on the power grid, for example. In other cases, the costs are immediate, the benefits far off. The pros and cons need to be assessed transparently.
DiVanna believes that, when it comes to weighing the trade-offs, companies will have to consider the whole value chain. They need to employ what he terms ‘associative aggregation’ to find the common thread among stakeholders that shows how actions will impact business – for good or bad.
6. Bias for action
Companies which adopt a grand vision – or even a philosophy around a business’s role in bettering wider society – are to be admired and encouraged. But grand concepts and ideals too often do not move beyond the rhetoric in a conference speech.
Bureaucracy, inertia, delusion, leadership changes and financial constraints can undermine the most treasured projects. Where such a vision looks unfeasible or overly idealistic, companies would be advised to pursue smaller incremental changes that have a better chance of success.
ESG ambitions should be big enough to galvanise and inspire, but not too pie-in-the-sky as to be unattainable. Driving all ESG actions and goals should be a decisive question: how likely are we – and how swiftly can we – achieve our goals?
There must be a strong bias for action. The potential latent in change can only be accessed by taking deliberate steps. The difference between a workforce that understands the rationale for ESG and one that actively pursues (and knows how to pursue) the delivery of its goals is fundamental to continual success.
Alex Edmans believes that the key to ‘growing the pie’ is to lead with conviction; to trust that focusing on increasing stakeholder value will lead to better results for everyone – including shareholders. Action is crucial. The coronavirus pandemic is a traumatic event, but it could be a catalyst for the acceleration of positive change. Purposeful leadership is dynamic; its success relies on pushing for innovation, for reinvention, for the redrawing of the corporate model.
Our survey shows that companies are aware that they need to take some action to respond to the ESG imperative. 85% of our participants say they have leadership or skills development programmes in place to support teams through ESG implementation. However, if those programmes are guided by insufficient clarity and alignment, they may be wasted investments.
Vlatka Hlupic warns that leaders may feel overwhelmed by the task that lies ahead – perhaps stunned by ambiguity – but that it is possible to view it as an opportunity to create a ‘happier, healthier and more purposeful world’.
Related Solution: Sustainable Growth Program
Headspring’s pre-designed Sustainable Growth program helps corporate leaders understand the fast-changing environmental, social, and governance (ESG) context in which they operate. It guides participants in how to design and implement practical and responsible strategies for sustainable development that maximise the benefit for the company and wider society.
Sustainable Leadership is a key aspect of this program. Participants learn about their role and purpose as a sustainable leader, and the different ways they can make a positive impact on society and business. As part of the final project, participants are encouraged to develop a strategic ESG plan, which can be further developed in the following three months. To find out more and enquire, click here.