ESG – Is It There to Tick a Box or Rattle the Cage?
The combination of regulatory impetus, consumer sentiment and investor pressure has driven ESG (Environmental, Social and Governance) to the top of the corporate agenda. While companies large and small are increasingly thinking about their ESG stance, the matter is especially pressing for large multinationals and global brands.
For these players, the extent of their commercial footprint and the geographic distribution of their business are vast and the tendrils of their supply chain can sink deep into the gloom. And the better known the brand, the more sensitive it is to reputational damage and the alarming impact that can have on the balance sheet.
Dermot Corrigan, CEO of smartKYC, discusses whether ESG is just another compliance tick box exercise where the main aim is to avoid adverse media coverage, or if an investment in comprehensive ESG policies and practices can ensure that the largest of corporates is able to keep its own house and supply chain in order – and actually deliver attractive returns.
Most CEOs of global businesses are well aware of the value of brand reputation and that any tarnishing of that reputation can be costly – in terms of both sales and stock performance – and can take a long time to recover. But the flip side to this is a significant halo effect for brands that are committed to ethical trading or have demonstrated a higher purpose beyond commercial performance, such as social impact. Indeed, in a recent report, KPMG Me, My Life, My Wallet 2020 cited that 90% of customers are willing to pay more for ethical retailers and 56% say the environmental and social practices of a company have an impact when choosing to buy from them.
Positive ESG ratings are increasingly important in investment decision-making and can have a positive impact on share performance. However, we believe care should be exercised in relying solely on ratings. One major criticism is their lack of objectivity – in the end it’s an analyst making a judgement call.
Positive ESG ratings are increasingly important in investment decision-making and can have a positive impact on share performance.
The ratings also tend to be largely based on company disclosures, so there is a risk of corporates ‘marking their own homework’. What can often be missed is the ground truth of what is happening at operating level and this is where a robust, independent monitoring programme is required – using technology to screen at high frequency for any evidence in the supply chain of malpractice, for example the use of forced labour or predatory pricing.
Another complaint regarding ratings is the lack of a generally accepted definition of ESG. One trap we see large companies fall into is to think about governance solely in the context of how the board functions – is it diverse enough, does it have adequate non-executive director representation, is remuneration appropriate? But surely governance is also about how the business operates on the ground, its actual trading behaviour. A veritable plethora of policy documents created with the very best of intentions by your Chief Ethics Officer is no substitute for current intelligence on a remote supplier that might be facing accusations of infringing intellectual property rights, or displacing communities, or rigging bids. Programmatic risk monitoring of these relationships could make the difference between nipping something in the bud and allowing a raging ESG crisis.
With every workforce increasingly comprising of eco-conscious millennials that expect corporate social responsibility (CSR) written into the corporate DNA, a huge potential advantage of a robust ESG programme is its positive impact on employee engagement, loyalty, retention, advocacy and in turn, productivity – all hard wins in the normal scheme of things. New research from Longitude found that 83% of businesses describe sustainability as a business opportunity to be exploited, with 72% recognising that it is a lasting trend. It’s no wonder that 77% of companies believe their sustainability strategy is having a positive impact on employee engagement and retention.
And finally, an often overlooked positive of an ESG risk monitoring programme is its contribution to operational resilience. Not only does such proactivity reduce the risk of invasive and disruptive legal and multi- jurisdictional regulatory actions but it might also anticipate problems and mitigate potential risks. Knowing early on that a supplier might be facing strike action from employees or protests from local communities or is recalling products due to health and safety concerns will allow the business to make alternative arrangements to protect the integrity of its supply chain.
For us and for the many corporates and UHNWI’s we are working with, it’s pretty clear: sound ESG policies supported by high-frequency pervasive monitoring technologies deliver way beyond a tick in a box.