By Rumina Dhalla
Companies who want to achieve high performance for their environmental, social, and governance (ESG) activities must construct an authentic sustainability identity. A superficial or inauthentic image-building strategy will likely lead to stakeholder scepticism, which will impede the company’s ability to capture the value and benefits of becoming sustainable. ESG performance must emerge from authentic identity transformation.
Increasingly, customers, investors, and employees are seeking out sustainable options for their consumption, investment, and employment decisions, and companies are recognising the necessity and potential upside of being sustainable. It is thus no surprise that high-impact, high-performing environmental, social and governance (ESG) investments are sought by investors seeking to invest in sustainable or ethical assets, as well as by consumers, potential employees, and even activists striving to drive companies toward sustainability1. This rising tide can be seen through the popularity of ESG investments, which are estimated to represent around 10 per cent of global fund assets2. Companies are recognising this shift and are responding through sustainability action and disclosure of their environmental and social performance, in addition to their financial achievements, with over 90 per cent of S&P 500 companies and 70 per cent of Russell 1000 companies now reporting on their ESG performance3. Also growing in popularity are ESG and sustainability rankings, such as the Global 100 Rankings by Corporate Knights Magazine4, that rank companies based on their ESG performance, and sustainability ratings, by independent ratings providers such as the Morningstar Sustainalytics ESG Risk Ratings, which rate companies based on ESG risk5.
Sustainability must be more than public relations, marketing, and “box checking”. It has to become part of the company DNA.
While there is burgeoning interest in engaging with high-ESG performers, there is also scepticism that many of these companies are “greenwashing”. Some question how it is possible for companies in traditionally harmful industries such as tobacco, fast food, and oil and gas to be part of ESG funds and rank high in sustainability rankings6. Others suggest that company claims of sustainability are misleading and are seen as generally made to divert external attention away from their damaging products and practices7.
We suggest that companies who are building their reputation for sustainability and are disclosing their performance in ESG activities must ensure that they are building their internal sustainability identity authentically. Sustainability must be more than public relations, marketing, and “box checking”1. It has to become part of the company DNA. There are numerous strategies that companies can use to build an authentic identity for sustainability. In the next section, we outline some key strategies that companies should consider if they are to counter external scrutiny and scepticism8.
Who is on your Board?
Companies who are building their sustainable identity must ensure that their Board of Directors supports and represents their sustainability mission. Corporate boards have traditionally focused on short-term financial returns9 and a board that is known for its focus on financial returns will likely resist the strategies for sustainability, particularly if they lack the expertise and background in sustainability. There are numerous risks for the board associated with poor ESG performance, for example risks from environmental issues related to pollution, product safety concerns, human rights violations, and poor labour practices10. Institutional and other influential investors are exerting pressures on companies to embrace their environmental and social responsibility, so that corporate boards are being pressured for sustainable action11. Ensuring that the company board directors have expertise, a track record, and a reputation for environmental or social justice in addition to their financial acumen will likely result in a strategic mission and plan that integrates sustainability into its core. Companies must also pay attention to board diversity, which is critical, as investors and other stakeholders are pushing for diversity on corporate boards12. For example, BlackRock, an influential institutional investor, looks for boards that are diverse in race, ethnicity, and age, as well as in expertise and experience of diverse geographical locations13.
Who are you hiring and promoting?
Companies building an authentic sustainability identity must ensure they are hiring, recognising, and promoting employees who are achieving excellence in sustainability. Other employees will see these successes and recognition as affirmation of the firm’s commitment to sustainability. Furthermore, employees are exerting pressures on their firms to respond to environmental and social issues and become sustainable14, and this change is being triggered from bottom-up pressures from employees15. Externally focusing on sustainability without internal commitment, and continuing to promote actions that value achievements and profits from actions that do not support sustainability will likely lead to disenchantment and scepticism.
How do you operate?
Companies must ensure they are hiring, recognising, and promoting employees who are achieving excellence in sustainability.
Authentic sustainability also requires turning a critical eye to internal processes and practices. A company must conduct a sustainability audit and self-evaluation of how they operate and whether they “walk the talk”. This may require exploring new concepts such as circular economy to reduce resource and waste intensity and converting to renewable energy16.
Who’s in your supply chain?
One of the important considerations of sustainability is ensuring that all aspects of the supply chain are also sustainable17. Companies must ensure that all their suppliers meet their sustainability mission and values. This includes not only suppliers of physical goods but also their service providers. This focus will also help mitigate reputational risk in case a supplier becomes embroiled in a negative environmental or social justice issue. Risks identified with suppliers18 have included pollution, environmental spills, workplace health and safety issues, product safety issues, labour disputes, and corruption and bribery. Companies who engage with suppliers with poor ESG performance are no longer allowed to plead ignorance19 and are held accountable for their suppliers’ actions. They thus have to make sustainable supply chain management part of the corporate strategy and decision-making20, and be proactively involved in suppliersʼ sustainability strategies, or choose suppliers with a strong sustainability performance. Ensuring that the supply chain is sustainable will not only reduce ESG risk, but also enhance the company’s sustainability reputation.
Focus on the social in ESG
Much of the current focus in ESG and company performance is on materiality, that is, the financial or “material” implications for the company. There is also focus on environmental issues, such as resource intensity and carbon emissions. While these issues and strategies are important in order to address climate change, companies who are authentically achieving their sustainable mission go beyond materiality, cost, and emissions reductions and positively contribute to all aspects of ESG. There is a greater push to increase focus on the “social” in ESG21, which can provide competitive advantage to companies. It has recently been reported that, for Americans, how a company treats its workers was more important than its actions related to climate change22.
Hold yourself accountable
Companies who purport to be sustainable can be held accountable by external audiences, such as customers and employees23. Companies who overstate their achievements will be exposed. A recent study by NewClimate Institute and Carbon Market Watch, which was widely published in popular media, found that global companies were seen as exaggerating their progress on their climate action commitments24. Ensuring cohesion between actual and stated information on ESG performance will likely reduce risks from allegations of greenwashing25.
Companies who want to become authentically sustainable must construct a sustainability identity, or Sustainability DNA26, through their strategies, practices, and policies. A superficial or inauthentic image-building strategy will likely lead to scepticism and impede its ability to capture the value and benefits of becoming sustainable. Consumers will punish those who are found to be greenwashing and making false claims27. ESG performance must emerge from authentic sustainable identity transformation.
This article is originally published on November 1, 2022.
About the Author
Rumina Dhalla, PhD is Associate Professor at the Gordon S. Lang School of Business and Economics and the Director of the Institute for Sustainable Commerce at the University of Guelph. She has also accumulated over 20 years of industry experience, much of it in the Canadian banking industry. An accomplished teacher in both the undergraduate and graduate programmes, she was awarded the MBA Distinguished Professor Award and received the 2019 United Nations Principles for Responsible Management Education NA Excellence in Service Award. She is Vice Chair, PRME North America Chapter, Guardian with the Global Responsible Leadership Initiative and, most recently, was appointed Chair of the Board for the UN Global Compact Network Canada.
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