Beyond a buzzword: ESG’s coming of age

ESG is getting serious. Once considered by the sceptics to be just another acronym cooked up as a successor to “CSR” in the corporate buzzword bingo league tables, the reality is that ESG (Environmental, Social and Governance) issues are increasingly central to business and investor strategy.

Want proof? A widely-cited stat from Bloomberg Intelligence suggests that ESG assets globally will hit, indeed exceed, $53trn by 2025.

A turning tide?

Predictions are all very well of course, and play into the growing feeling that reform is happening to the capitalist system – that ‘doing well by doing good’ is the mantra which will govern corporate decision making in the ‘new normal’.

The issue with this narrative is the same one which plagued the concept of CSR. That is, in the eyes of many, it all sounds great but it didn’t (or doesn’t) actually achieve very much…

Take the example of the much-lauded Business Roundtable’s Statement on the Purpose of a Corporation, published in 2019 and seen by many as the coming of age of stakeholder capitalism. A recent piece of research claimed that, far from representing a move away from shareholder primacy and towards stakeholder centrality, the Statement was, in fact, “mostly for show”. Ouch.

Part of the problem, as identified by the researchers, is accountability and consequence. Their hypothesis suggests that a prime cause of the Statement’s shortcomings is that it has not (yet) been followed by meaningful change to corporate governance structures and company by-laws within the signatory organisations.

In similar fashion, a report from fintech firm Util as covered by the Financial Times suggested that so-called ESG funds actually have relatively little impact, largely because they rely on rankings and data points which set the bar “abysmally low”.

Clearly the implication is that in order for this new form of enlightened capitalism to actually have an effect, there must be formal mechanisms to implement, monitor and enforce.

The purpose imperative

That is, in fact, exactly what’s happening now and is why ESG has ratcheted up as both a reputational and broader strategic issue for businesses.

Up until relatively recently, holding companies to account for their performance on ESG metrics – whether Co2 emissions or workplace diversity – was largely the preserve of the ‘soft power’ that is wielded by consumers, clients and investors. Put simply, if people didn’t like what they saw and if a company didn’t align with their values then their money would be taken elsewhere.

This remains an incredibly powerful force, particularly for consumer brands, and one which is at least partly behind the drive of some to centre their business models on ‘purpose’ – recognising that corporate success is in large part reliant on public trust and alignment with the moral expectations of customers/clients.

That soft power, though, is now increasingly being buttressed by ‘hard’ power – in the form of law and regulation.

Regulation and reputation 

The writing has been on the wall for a while as far as this is concerned.

A good example is Gender Pay Gap Reporting which has significantly increased scrutiny of workplace diversity and has helped both shine a spotlight on the issue and lead to progress.

Crude but effective, according to a recent LSE blog.

This regulatory requirement has been to a large extent enhanced by a corresponding exertion of softer power, in the form of rising stakeholder demand for firms to go above and beyond the letter of the law and the domino effect which inevitably follows when a vanguard makes a decisive move – be that the incorporation of ethnicity pay gap data or, in the case of many professional services firms, including partnership pay gap data.

There have, then, been substantial efforts to hold companies to account for what they actually do on ESG issues.

But more recent focus has been on holding companies to account for what they say they do – an altogether more complex task and one which gets to the heart of the main criticism of the likes of ESG and CSR. That, in fact, it’s all just words.

Turns out that, as us PR advisers have been saying, those words do actually matter.

This is as true in, say, financial services as it is in consumer industries.

The greening of finance

For example, the EU Sustainable Finance Disclosure Regulations which came into effect in March this year have introduced new standards of transparency on sustainability risks for financial services firms – such as banks, fund managers and insurers – and seek to provide clarity to investors over just how far products live up to their ESG billing.

Put simply, the regulations are an attempt to eliminate the issue of greenwashing in the investment world.

This has already had a tangible effect with Bloomberg reporting just last week (29 September), in the wake of the investigation into DWS Group, that many European asset managers are dropping the previously almost ubiquitous ‘ESG-integrated’ label from many corporate communications and investor documents.

Misrepresenting ESG credentials is, now, a fundamental reputation risk. At the same time, ESG metrics are increasingly central to investor decision making – including in the PE market, often considered to be ‘hard-nosed’ and focused squarely on financial return.

Crackdown on misleading claims

Meanwhile, in the world of consumer brands, a new initiative launched by the UK’s Advertising Standards Authority will include updated guidance that will set out the principles advertisers must follow to ensure communications don’t mislead consumers about environmental claims made about products or brands, as well as a series of investigations into particular issues such as green energy tariffs and electric vehicles.

The ASA’s statement followed an even more stringent position set out by the Competition and Markets Authority (CMA) just days before. The new ‘Green Claims Code’ gives businesses until the New Year to make sure that any environmental claims comply with consumer protection laws.

Ahead of COP26, set to be held in Glasgow, UK regulators and lawmakers clearly want to be seen to be getting tough.

The media landscape

There’s another stakeholder to consider, though. The media.

The growth of interest in ESG has been reflected in huge volumes of media coverage over recent years.

Indeed, an analysis of the key UK national publications along with Reuters and Bloomberg shows that, from the year September 2018 – 19, media mentions of the terms ESG or Impact Investing have increased 100% every twelve months.*

This has real implications. Public awareness is growing, scrutiny is increasing, and at the same time the regulatory environment is toughening up.

Falling short at these pressure points is a significant reputation risk for brands. But, conversely, there is now, more than ever, opportunity for brands to build trust, enhance reputation and build business resilience through authentic engagement on these issues.

Forget the predictions, ESG is all grown up and it’s here to stay.

Further, from supply-chain management to social media marketing,  it will be at the heart of brand, communication and wider business strategy for the long term.

Buzzword? No chance.

 

Contact Tal Donahue

 

 

*Research conducted using Cision media intelligence. Titles examined for mentions of “ESG” or ‘Impact Investing” were The Times, Financial Times, The Telegraph, Daily Mail, The Guardian, Bloomberg, Reuters.