The term ESG is very much in vogue. This is partly due to the three words that compose the acronym, which are environmental, social and governance. The second reason is that businesses need to start reporting on their ESG performance and such reports will need to be audited.
The Corporate Sustainability Reporting Directive (CSRD) adopted by the European Union is an EU ESG standard designed to make corporate sustainability reporting more common, consistent and standardised, like financial accounting and reporting. Initially, the directive will apply to companies that meet certain criteria. The belief of many people is that the reporting requirement will eventually be extended to all businesses.
Given that companies will need to report on their sustainability initiatives, and the report will be audited, we can easily think of it as a chore. Others may see it as a consequence of climate change or a consequence of the corporate scandals of recent years. Others still may view it as a natural consequence of corporate social responsibility (CSR) initiatives.
If we take this approach, then we would be missing the fundamental point of ESG. In fact, what concerns me today is not so much ESG initiatives but why we have needed to focus on ESG. ESG is the strategic tool but the principle is something else.
In Malta, a group of leading companies have come together to form the ESG Alliance. This is all very positive as they are setting the right example. However, these companies were probably on the right track anyway, which is why we need to understand why sustainability initiatives have become so important.
When businesses flout governance rules, the interests of society are not safeguarded
The principle involved is that businesses need to respect the society in which they operate. I have mentioned in previous contributions that management consultant Peter Druker had stated that “the purpose of business is to create a customer”.
As such, the claim that the objective of any business is to make a profit needs to be debunked.
Moreover, any business operates within a society, and its interests cannot conflict with the interests of society and the persons who make it up. From a practical perspective, this has a number of implications which ESG seeks to encompass.
It needs to be appreciated that the harm that has been done to the environment and the impact on climate have been caused by businesses that have ignored the interests of society and put their self-interests first. We have experienced this on a global level, on a regional level and on a national level (including Malta).
Over the last decades, in spite of efforts made by successive governments to achieve a better distribution of income and reduce income inequalities, the gap between the world’s richest and the world’s poor has widened significantly. Corporate social responsibility was paid lip service by many businesses and little effort was made by businesses to achieve greater social cohesion.
Fraud, money laundering, white collar crime, child labour and wilful misreporting are all examples of bad corporate governance. Many fear that this is just the tip of the iceberg. When businesses flout governance rules, the interests of society are not safeguarded.
To make the economy more sustainable, we need to make businesses more sustainable. To make businesses more sustainable, they need to respect society.