Think environmental, social and governance (ESG) factors only matter to specialist investors? While ESG standards may have been the exclusive purview of sustainability investors a few decades ago, that is no longer the case. “Only two decades ago, concerns about climate change, water scarcity, exposure to corruption, working conditions in the supply chain and gender equality were barely on the agenda of company executives. They were considered externalities or were dealt with through philanthropic approaches with little or no impact on the bottom line,” noted Harvard Professor of Management Practices Dr. Robert Eccles, and former United Nations Global Compact Executive Director Georg Kell. But times have changed.
Just two years ago, the Organization for Economic Co-operation and Development (OECD) began promoting “responsible business conduct for institutional investors” in its Policy Framework for Investment. In it, the OECD encourages investors to engage with corporate leadership on ESG risk and contends that ESG issues represent part of a company’s fiduciary duty when evaluating long-term value. It’s an approach that more institutional investors are taking to heart. In an article on EthicalBoardroom.com, Michelle Edkins, a Managing Director and Global Head of Investment Stewardship at BlackRock writes, “An emphasis on investing for the long-term, changing client and societal expectations, and better data, reporting and research have all influenced a steady mainstreaming of ESG considerations by investors.”
And it’s not just institutional investors that are raising the bar on ethical expectations. Shareholders increasingly hold corporate leaders and boards to high ethical standards. Likewise, consumers—particularly the 83.5 million U.S. Millennials—want the companies that they engage with to make environmental sustainability and social justice a priority. In fact, this young generation also prioritizes socially responsible employers during job searches, so ESG factors are even more critical as Baby Boomers retire out of the workforce.
Taking a Closer Look at ESG Factors
Among the three factors, governance reigns supreme—at least in the eyes of companies. That’s because how a company is managed not only has a strong influence on an organization’s long-term viability and quality of its returns, but it is an inherent part of day-to-day operations.
Environmental and social factors, on the other hand, have not traditionally been a focus, except in cases where they impact operations or strategy. Certainly, it’s not a bad thing if companies implement sustainable practices because they are good for the bottom line, but today investors, consumers and indeed, corporate leaders, expect more.
“For a long time, companies thought—and they were advised to think—that if you respect the law that it is enough, but nothing is more wrong,” said Emmanuel Lulin, Senior Vice President and Chief Ethics Officer at L’Oreal, in an exclusive interview with LexisNexis last year. “An ethics program based only on compliance is a failure of the mind because you are just asking people to obey but not to understand.” Lulin went on to say, “Things can be perfectly lawful and perfectly awful.” It’s no longer enough to put a commitment statement on your website and tout your ESG commitment in the annual report. Companies must go beyond box-checking and put words into measurable action. Benchmarking against best-in-class ESG performers is a good place to start. Adopting best practices is another important step.
Proactive Risk Management Helps Meet ESG Standards
Since ESG—and its close relative, corporate social responsibility or CSR—are not going away, companies must take the initiative to build risk management strategies that enable the transparency that investors, stakeholders and consumers desire. This begins with risk-appropriate due diligence when on-boarding new business partners, suppliers or other agents acting on behalf of the organization. But it can’t end there.
Without ongoing risk monitoring, a company’s due diligence efforts are for naught, since a substantial percentage of regulatory and financial risks only emerge after due diligence is complete. And in the digital age, reputational risks—such as the discovery of forced labor in a supply chain—can quickly move from a single headline to a viral sensation in a matter of days, or even hours. By implementing automated monitoring of business-critical third parties across PESTLE categories (Political, Economic, Socio-Cultural, Technological, Legal and Environmental), companies can proactively mitigate risk while meeting their commitments to ESG or CSR programs.
What barriers does your organization need to overcome to deliver on the ethical expectations of institutional investors, shareholders and the general public?
For more than 40 years, LexisNexis has been helping companies build and maintain trusted relationships using our versatile technology and comprehensive global intelligence to support a risk-based approach to due diligence and on-going monitoring. With better insights, companies can make informed, data-driven decisions.
Because good profit comes from making the right strategic decisions.