How A Company Can Stay True to Its Purpose

A Simple Strategy On ESG

The environmental, social and governance (ESG) criteria are some of the key non-financial factors that investors have started using to assess companies and their associated risks over the last decade. With growing awareness of the evolving role of the organisations, these have become an important theme for assessing value creation and protection. 

Since the United Nations announced its 17 Sustainable Development Goals (SDGs) in 2015, the quantum of what we can call sustainable assets has grown at a compounded annual growth rate of 11 per cent touching $35.3 trillion in 2020. With serious money chasing ESG friendly assets, ESG themed investments are predicted to cross $53 trillion by 2025. 

While ESG is part of most boardroom discussions and often transcends to dinner table conversations, there seems to be a pause in the rush to align assets with this popular theme. There is no denying the virtues of the ESG theme, and yet the enthusiasm has been tempered by circumspection of late. 

Allegations of greenwashing, where companies have been accused of marketing non-deserving investments as sustainable assets, have raised a question mark around ESG, and its efficacy as an investment theme. May be this is a good time to take a re-look at the theme and try to understand if it needs some re-engineering. 

Focus On One Issue At A Time 

A write up published by the Economist some time ago asserted the three elements of ESG need not be clubbed together. This article argues that when ESG is looked at in totality, it defeats the purpose as it tends to set conflicting aims for the organisation. It even suggested that the focus be on ‘environment’ and even more specifically on emissions.

I believe this suggestion provides a good chance to businesses to focus and deliver on the basis of one non-financial factor and take those learnings seriously before moving further ahead. There is no need for one organisation to outperform on all the components of ESG at once. And social impact efforts are almost always interwoven into a company’s strategy to create real value. 

Businesses must concentrate on the variables that can be essential or strategic to their operations while remaining loyal to their organisational mission, and earning the respect of their stakeholders. 
 
Use Core Competencies To Serve

This might be a good time to consider the idea of stakeholder capitalism or a system that works to serve all the stakeholders of a business. This is an idea that can also complement the notion of ESG very well. The best way to go about it is to focus on the core competencies of a business and figure out how it can have a positive impact on society.

Ideally this should go beyond the traditional CSR route, not depend on government mandates at all, and create tangible and measurable impact using modern analytical tools. 
Let us look at some examples of marrying core activities with social impact. For instance, how does sustainable fashion deploy digital tools to address the issue of waste management?

Another area where modern tools can help is where a company is trying to promote circular economy. Green technologies help to replace and use clean development mechanisms to achieve their corporate goals. 

Build Transparent Businesses

Once a business is able to identify one element of ESG that it will champion and also use its core strengths to serve stakeholders, it can take a third important step. This is to build a transparent organisation. 

Transparency is the key to building trust and showcasing a company’s values and purpose. There are several ways in which this can be achieved. One is by using third party programmes to quantify contributions to environmental sustainability. 

Another is by joining a carbon offsetting programme to create visibility around ESG efforts. Such visibility of ESG efforts also helps customers make their choice. Transparency in operations is also partly a nod to the governance element of ESG. Organisations should build systems and capabilities to communicate the information objectively and unambiguously.

The simple strategy explained here of focusing on one element of ESG, aligning core competencies to serve all stakeholders and then adding a layer of transparency actually helps an organisation tick all the important ESG boxes without deviating too much from its operational processes.

At the same time it tunes the organisation for a better future that does not have to depend on the outcome of the ESG debate.

(Sanjiv Lal is MD & CEO, Rallis India.)