The views and opinions expressed in this article are those of the thought leader as an individual, and are not attributed to CeFPro or any particular organization.
Ameet Barve, former Managing Director and Management Board Member, Lloyds Banking Group
Recently, the industry has seen a big shift in focus towards ESG, with climate change often dominating the headlines. Why is it so important to ensure that attention is also turned towards the ‘s’ in ESG?
The core principle behind ESG is one of social contract. If you look at the genesis of ESG, its predecessor was CSR (Corporate Social Responsibility), which comes from the concept of ‘social contract’. The economist Howard Bowen wrote a book in the 1970s that talked about the social responsibility of businessmen: providing jobs; being fair and honest in dealings with employees and customers; and becoming more broadly involved in the conditions of the communities in which they operate. This was when we started seeing the pivot from individual business owners like Andrew Carnegie and J.D. Rockefeller contributing to society, to corporations as a whole taking on a more socially constructive thought process.
Over the years, following perspectives from thought leaders like Sandra Holmes and Prof. Archie Carroll, this evolved into CSR. While as a concept, social contract and CSR have been around for a while, ESG (with all its accompanying regulation and guidance) has made it possible for organizations to quantify and articulate the steps they take in this space.
That said, the environmental and governance elements of ESG are rather more quantifiable than the social, with metrics like carbon emissions and tangible governance actions around processes, values, and controls being broadly homogenous across industries. The social element, however, is somewhat more complicated. While there are topical issues that gain universal attention, quantification in homogenous terms of social initiatives that are targeted for each organization’s unique ecosystem is harder. All elements of E, S, and G overlap in their scope and impact, but there are no obvious metrics that all organizations can use to homogenously articulate their unique, socially focused initiatives. There is a lot of work to be done in defining these but, once actioned, more organizations will be motivated to undertake higher impact, socially focused initiatives.
As this evolves, there are a couple of nuances to ponder:
What are some of the today’s key social challenges, as well as those on the horizon to which we should be paying more attention?
The majority of the challenges we see are prolific in terms of ESG – they either stem from, or cascade into, each of the elements of E, S, and G. What can be termed as ‘key’ is a rather personal view. I tend to apply two lenses – the tactical ‘urgent and immediate’, such as climate change; and the strategic ‘urgent but with sustained, longer-term impact’, such as gender equity, racial equality, and overpopulation and its cascade effects (refugee crises, food, water and healthcare access, education, etc.). Because of how society has evolved, many of the environmentally focused elements have become immediate and urgent. On the other hand, the socially focused elements are also urgent and will have a strategic impact.
How can organizations better define and implement social change across business lines?
As mentioned earlier, the genesis of this entire conversation is the social contract. Its evolution towards ESG and the focus on quantifiability is driving the environmental and governance elements but addressing these also has meaningful social impacts. That said, if organizations truly want to focus on social elements, they need to return to the core principle of social contract, i.e., how can the organization improve the community (ecosystem) in which it operates and not be guided solely by the quantifiable and homogenously advertisable elements.
If we look at the journey of social contract in its evolution to ESG, there was a stage when it was known as ‘corporate social performance’. This resulted in companies focusing almost entirely on what would give them good PR. Thankfully, this has evolved further, with many corporates and FIs thinking
in terms of their values and how to articulate and implement them. Since the 1980s we have had industry leaders like Johnson and Johnson (who established values around social responsibility and placed them at the core of their functionality), Milton Hershey (who took responsibility for an entire town, employees’ health, education, civil utility, etc), and the Tata Group in India. This trend of company values becoming the core principles of organizational operating philosophy has become more prolific in recent years.
As a result, we now have entire swathes of industry becoming facilitators to enable other organizations to implement their ESG or social initiatives. Examples include Stripe, which has developed a climate solution to enable people to articulate their carbon emissions; and Lululemon, which has revamped its entire supply chain process to be more sustainable. Organizations are realizing they can make a lot of difference and are taking charge of outcomes!
To what extent are regulators focusing on the social aspect of ESG?
There is now extensive regulation around ESG in general, and it has also been a catalyst in driving positive social change. More recently, the EU issued the Sustainable Finance Disclosure Regulations, with the UK following quickly with the Task Force on Climate- related Financial Disclosures (TCFD). The European Securities and Markets Authority (ESMA) has its own guidelines in the form of a new Sustainable Finance Roadmap; Israel has proposals for disclosures on CSR and ESG; China has introduced environmental disclosure rules; and India is exploring ESG ratings providers’ regulations. In the US, California now requires companies to disclose their carbon emissions; and the Securities and Exchange Commission (SEC) came out with new rules requiring publicly traded companies to disclose how climate change risks affect their business.
There is also regulation targeted at preventing greenwashing, with ESMA releasing guidelines and SEC changing some rules to prevent the misuse of ‘green’ nomenclature in the asset management industry.
What is apparent is that, by its very nature, regulation tends to center on aspects that are measurable and quantifiable. As a result, it is focused on demanding quantifiable elements of ESG. However, we can see that it is also driving socially focused initiatives and a desire across the industry to set homogenous terminology to articulate these.
There are also certain guidelines on purely social initiatives, like the European Commission’s proposal to focus on potential labor abuses, and Scope 3, which centers around firms taking ownership of their supply chain and making sure their entire source spectrum is sustainable (or working towards ensuring it is sustainable). In many ways, the ability to articulate and glean positive PR from actions is driving sustainability initiatives.
In summary, ESG regulation is ensuring these topics remain the focus of mainstream dialogue.
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