ESG — The Most Important Benefit

Environmental, Social and Governance (ESG) reporting drives increased accountability for the consequences of organisational activities. However, it also has a more profound and exciting benefit. This is the recognition ESG gives to interdependence, which is necessary for the leap to the next level of human maturity. While ESG is not a panacea for the ails of conceited capitalism, it is a push in the right direction to restore care and compassion for the community and to shift our focus back towards those things that truly sustain us.

What Do We Mean By Community?

Within the ESG framework, the community is a concept usually referred to only in the Social element. However, I would argue that the ESG, in its entirety, is about community. This is because the community is not a singular or simple concept. In their book ‘Active Hope.’, Macy and Johnstone outline four community levels, as outlined in the following diagram.

As this model shows, there are multiple community levels, ranging from our families to the community of all creatures on this planet. The most important thing to note, though, is that every single one of these layers of community is interdependent. What we do at the individual and neighbourhood level flows out to influence the health of our earth community and vice versa.

How Community Is Captured In ESG

The same notion of layers of community can be applied to the ESG framework. In my view, ESG represents the following community levels.

The Business Community Model

The Governance layer relates to the innermost community of an organisation, being its board, managers and shareholders. These are the key decision-making entities and have the greatest influence over impacts on the other community levels. This community of governance is responsible for balancing the short-term and long-term interests of the myriad of organisational stakeholders. The quality of the governance in any organisation is pivotal to its short-term performance and its long-term sustainability. In fact, I would argue that poor governance is responsible for 99% of issues facing any organisation, and great governance is responsible for 99% of its success.

The Social layer of ESG is where we usually encounter the notion of community, but here again, we see multiple layers. We have a group close to the governance layer, being the community of employees. Various groups expand outwards from this core depending on how they are impacted by and can influence the organisation. These next layers include the organisation’s customers, suppliers and community groups related to the specific location and nature of products and services provided by the business.

The Environmental layer of ESG relates to the earth community, comprising the global community of humanity and our relationship with all life forms. The decisions made at the governance level and enacted through the social layers determine if the organisation plays a role in decimating or restoring resources and relationships across the other community levels.

The Focus on Materiality

Firms are encouraged to undertake ESG initiatives to deliver material benefits. Leaders and decision-makers are told to take action on those things that can influence:

1. Revenue — e.g. a strategic shift could target the growing market of ‘organic’ food preferences and increase revenue from this market segment.

2. Costs — e.g. relationships could be built with suppliers to reduce packaging waste and production costs.

3. Regulation/legal risks. e.g. training to prevent discrimination and harassment will mitigate risks around damaged reputation from employee or customer legal action.

4. Employee productivity, e.g. clear governance policy around pay equity, will help boost morale and performance.

5. Long-term asset management, e.g. shifting to renewable energy sources, reduces exposure to decommissioned or increasingly expensive energy assets.

All of these considerations are vitally important for the ongoing survival and success of the organisation. They are also aligned to those indicators that the decision-makers are judged by and rewarded for. These material impacts are necessary then to drive action and embed change. Without skin in the game, the ESG will become just another compliance exercise, and no real benefit will be gained. However, if we were only to focus on these material benefits from ESG, we would be missing the most important point.

Materiality Misses the Most Important Point

And the most important benefit of ESG is its attention to our interdependence. Let me explain by way of a wonderful quote from Jenna Jameson:

“Maturity comes in three stages: dependence, independence and interdependence.”

From the beginning of the industrial revolution, humans became divorced from our natural world and each other. Our goal became to make more stuff, sell more stuff, and own more stuff. Life became a competition between neighbours, communities and corporations, as each fought for scarce resources and the title of success. We forgot we were children of the earth and that our actions had consequences for those closest to us and those on the other side of the world. We took what we needed with little regard for the long-term outcome and became insular and selfish. Now, look where this behaviour has landed us.

We have tried the mindless and robotic production and consumption route, but the focus on materialism has only led to destruction and despair. Yet, we have learned much along the way. One of the greatest learnings shown by the growth of ESG is that individualism and independence is not a sustainable strategy. If we want to continue to mature, grow and develop as a race, we need to apply the intelligence we have gained and appreciate the reality of our interdependence across all community levels. It is time for us to return to our humanity and the natural laws that sustain us.

“Interdependence is a fundamental law of nature.” Dalai Lama

ESG Is Not The Messiah

One of the many interesting quirks in contemporary corporate life is the reliance on a Messiah. They usually take the form of a new CEO whom people believe can fix everything or a new business system that will provide all the answers. This simplistic view of the world seems to be embedded, despite all the evidence to the contrary. On average, CEO’s only have a tenure of five years, which is hardly representative of maintaining saviour status in the long-term[1]. And it is reported that over two-thirds of technology projects are either scrapped or identified as delivering “underwhelming” outcomes.[2]. Again, hardly glowing testimonials for the billions of dollars spent on business systems each year.

ESG is no different. It is an idea, a concept rooted in a particular point in time, and it is a simple theoretical model attempting to cover a very complex world. It is not the “answer” to either a corporation’s floundering profits or the intense impacts of climate change. The reality is that its effectiveness depends on humans, who may have vested interests in maintaining less than ideal status quo and who will game the system for personal gain. The exposure of ESG to human exploitation has already been recognised[3]. BCG now uses the term ‘authentic ESG’ to distinguish those strategies and actions intended to create a fancy façade and those genuinely geared towards delivering care and accountability.

Nevertheless, we must acknowledge and celebrate the massive step forward that ESG represents and the importance of the work undertaken to embed ESG authenticity. Only a few years ago, we were still focused on GRC — governance, risk and compliance, which only considers the inner circle of the business community model. ESG is a major shift in perspective and a large expansion of responsibility for non-traditional business outcomes. We see similar shifts in other areas of corporate life. For example, there is real progress being made by leaders in moving away from superficial wellness initiatives to critical discussions around psychological safety. In many areas, we are moving beyond surface issues and operational tactics to get to the real heart of the matter and embed meaningful change.

The Opportunity — Restoring the Balance

And we must not lose sight of the transformational opportunity that ESG provides. The discussions it drives about interdependence, care and accountability are shifting the nature of business. It is, even in its infancy, helping to restore the balance between:

• The individual and the community. Decision-makers are now more than ever needing to consider the greater good. The individual greed and self-interest of the ’80s are far less trendy than they used to be, now being replaced with a greater concern for altruism and reciprocity. Investors are now actively seeking out those organisations that give back not only to their shareholders but to all layers of their community.
• Unique contexts and shared philosophies. Each organisation is unique, with its own complex set of goals and challenges, its own culture and language. However, ESG creates not only a shared language but a common philosophy. It can bring people together across industries and nations with a shared understanding of what is important for their organisations and their vision for the future. While individual firm markets, products, services and structures may differ, with ESG, the overall goal of caring for their communities is clear.
• The tangible and intangible. Jacque Lucien said humans are nourished by the invisible, and we die by preferring its opposite. ESG instigates a rebalancing of priorities from tangible and material to intangible and invisible outcomes. Things such as profits and costs are being rebalanced with concerns around relationships and wellbeing. Productivity is balanced with engagement and psychological safety, and risk management is balanced with trust. Of course, ESG is not the sole contributor to this shift. Still, through its impressive and institutionalised influence, it has the potential to meld many of these concepts together and lift them to a heightened status.
• The masculine and the feminine energies. This may be a controversial opinion, but I see ESG as a tool to bring a greater balance between masculine and feminine energies in business. Traditional corporations are built on the masculine characteristics of competition and triumph. In contrast, feminine energy prioritises care, compassion and nurturing of relationships. While we may talk about gender diversity on boards and leadership teams, action is more important than gender identity. You can have a plethora of women in decision-making roles. Still, if they continue to act predominantly from masculine energy, you will not gain the benefits of true diversity. By bringing greater consideration and care to the vast community that a corporation serves, ESG is enabling real diversity in decision making, regardless of the gender of the people sitting at the table.

“Compassion is the keen awareness of the interdependence of all things.” ~ Thomas Merton

Ultimately, while many see ESG as a tool to breed a new generation of good corporate citizens, I see it as a leap forward to create the next evolution of the human species. Einstein believed a sense of independence and separateness was a delusion of our consciousness that keeps us locked in a prison. By recognising our independence from other humans, and with all life on this planet (and maybe even beyond), we can wake up, be fully conscious, and be free to live in and care for the communities that sustain us. ESG is no Messiah, but it does come with a message that courageous leaders can use to bring inspiration and transformation.

[1] https://www.pwc.com/gx/en/news-room/press-releases/2019/ceo-turnover-record-high.html

[2] https://www.vox.com/2015/10/31/11620222/study-nearly-70-percent-of-tech-spending-is-wasted

[3] https://corpgov.law.harvard.edu/2022/03/16/the-false-promise-of-esg/

Originally published at http://3rd-edge.com on April 22, 2022.