ESG: If your company is sustainable, it’s time to prove it

Environmental, social and governance matters are at the top of the boardroom agenda – or they should be. On issues ranging from combating climate change to ensuring workforce diversity, shareholders, financiers and regulators are demanding clear evidence that executives are working towards sustainability. Greenwashing is a fiduciary, financial and indeed existential risk for boards and managers.

Directors of all companies, no matter their size or where they are based, need to be aware of the issues to which ESG exposes them, as a business and as individuals. Further sessions of the popular ILA online 21st Century Board Leadership Model masterclass will take place in Q1 2022, packed with practical steps to develop robust ESG corporate strategies.

Real life, real impact

The climate emergency and Covid-19 pandemic are having real-life effects on all aspects of people’s lives, from where they live and what they eat to how and where they work. Governments are increasingly placing the onus on businesses to implement measures to curb climate change and speed the transition to a sustainable economy. Data and transparency are the key elements to ensure that companies are honest about their impact and whether they are putting words into action.

On regulation, the European Union has established a long lead in holding corporations, executives and finance providers to account. With hundreds of billions of euros on the table to refashion a greener post-Covid economy, sustainable finance disclosure requirements are already helping to direct capital to companies that embrace sustainability and away from those that do most harm. Institutional investors including big pension funds, asset managers and insurers must disclose the impact of their investments, which in turn, means the companies they invest in must supply the relevant data.

The disclosure regime is new, unfinished and far from perfect. Data gaps are widespread, but further harmonisation and the adoption of similar frameworks around the world will ensure no company is able to ignore the demand for transparency on the social and environmental consequences of their activities.

Global transparency

The latest EU proposals up the pressure. The European Parliament is calling for mandatory supply chain audits, not just from ‘farm to fork’ in food production but across every sector of the economy. Identifying and preventing human rights abuses including forced labour, slavery and human trafficking from the supply chains of European companies takes the EU’s agenda beyond climate and the environment into corporate social responsibility and governance. If approved, the proposals will also effectively extend the EU’s regulatory reach to every part of the planet.

Asia is catching up, adopting the EU’s approach to defining ‘green’ sectors (taxonomy), harmonising the standards by which green credentials are measured, and ensuring disclosures are mandatory for large and listed companies. And despite pushback from Wall Street and corporate lobbyists, under president Joe Biden the US is finally heading in the same direction.

Shareholder power

If governments can’t or won’t act, NGOs and activist investors are ready to use the tools at their disposal. Court actions over carbon emissions, pollution, human rights and other ESG violations are not only time-consuming and costly for companies, but most urgently a public relations nightmare.

Activist investors have become increasingly successful in winning support from other shareholders to oust directors, boards and CEOs who fail to respond to the decarbonisation agenda and have no clear transition plans in place. Major investors are themselves increasingly coming under pressure from stakeholders minded to throw their support behind the activists’ efforts, bringing trillions of dollars’ worth of voting rights to their cause.

Inclusive governance

If going green and drawing up a transition to net zero is hard enough, the rise of the circular economy will be even more complicated to navigate for directors. There are no set standards, no industry norms and regulation is patchy – at least for now.

Governments, shareholders and customers are starting to work to dismantle the linear extract-consume-discard economy in order to ensure products are designed for re-use from the ground up. France’s ban on plastic wrappings for cucumbers may seem a trivial example, but it’s just the start. The creation of a circular economy model to reuse precious resources is taking shape, with Europe again taking an early lead.

Can capitalism and capitalists adapt – and do so fast enough? Some sectors and business models, such as coal-powered electricity generation, are beyond redemption. Even China is backing away from its reliance on coal and financial support for its extraction abroad, even though the government faces intense pressure at home to keep the lights on and the economy running.

In other sectors, from financial services to automobile manufacturers and even in sport, boards and company management must engage, often with different stakeholders from the ones they are used to, to find a way forward as they face increasing demands from all sides, from shareholders to customers, distributors and suppliers, not just regulators and governments.

Benefits of an active approach to sustainability

Directors and shareholders have to be more mindful of the world in which they live and the communities they interact with. During the pandemic, news of companies treating staff poorly have gone viral on social media. When stories gain traction, share prices and reputations can suffer, sometimes irreparably.

Others have found that a positive approach can bring significant benefits. Danone is a good example of a company taking sustainability to its heart. It is one of France’s first enterprises a mission and soon aims to become the first multinational to be certified as a public benefit corporation (B Corp) in the US, incorporating the interests of communities beyond shareholders into its values and goals.

The shareholder primacy approach to capitalism has demanded that the needs of investors – rising share prices and regular, increasing dividends – trump all other goals and purposes. But in recent years that philosophy has been increasingly called into question, and not only by activists, but also pillars of capitalism such as BlackRock, the world’s biggest fund manager, and Wall Street investment banks.

“Consumers are demanding that businesses step up and are willing to vote with their wallet,” said Gabriella Hernandez Galindo, Danone’s sustainability and manifesto director, at a recent sustainable investment summit hosted by J.P. Morgan Private Bank. Seven out of ten consumers worldwide already avoid brands or products they associate with a negative ESG impact.