In post 3. “The authenticity gap”, we honed in on how the ‘feel-good’ acronym ESG is marketed, why, and some of the unintended consequences. We now take ESG back to basics, with the connection between externalities and reputation, and the role played by corporate culture.
Blinded by a thicket of ESG metrics, targets and ratings, managers can miss the point of why they measure in the first place: i.e., to ensure that their business endures. A precondition for sustaining success is to manage its ‘externalities’. The expression is entering common parlance. That is because people care. Companies may conduct their operations in a seemingly rational way. Still, if they assume that their operations don’t have ripple effects or that there won’t be a public erosion of trust by failing to address them, their prospects may be unachievable.
Corporate sustainability plans should include how stakeholders perceive the business and ways to prevent or manage potential reputational controversy. This can create a moral hazard. Sometimes, it may be easier to sugar-coat the status quo or create false impressions about the underlying business model.
Greenwashing is inherently linked to the question of integrity or the lack thereof of those who practice it. In their account of the ‘G’, too many corporate ESG reports omit how the board of directors creates a culture of sustainability. All relevant stakeholders should be considered, from employees to suppliers, customers, and regulators. It is revealing how annual reports tend to gloss over disclosures like stakeholder engagement, s.172, and risk management.
The emergence of ESG as the sustainability benchmark has often gone in hand with hypocrisy. Corporate leadership should set an example. Change must come from the top.
Register to join us on Wednesday 30th November from 2-3 PM (GMT) to explore the role of communications in disentangling ESG at a time when sustainability has never been higher on the world’s agenda.
Richard Costa, director and head of corporate reporting at Ensemble Studio.
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February 21, 2024