Improving ESG is all about corporate culture
The benefits of successfully managing ESG risks go beyond access to funding and lower Capex. They include fewer injuries, less pollution, less waste, fewer claims, and less downtime and much better collaboration
Companies looking to embrace environmental, social, and corporate governance risk management should make sure to bring the organisation and culture along to ensure congruent implementation. Failure to implement is the bottleneck for success
SUSTAINABLE investing has taken the lead in the spreading commitment to improving environmental, social, and corporate governance performance.
When ESG performance determines a corporation’s access to funding, it becomes business-critical, kicking off a race to improve and run up the scores.
But as a 2021 letter from investment management giant BlackRock to chief executives points out, committing to ESG goes beyond the old mantra of “what gets measured gets done”.
Both the ‘Dieselgate’ and 737 Max scandals are strong reminders that shallow environmental goals fall short when the corporate culture is unaligned.
These are just two examples illustrating the need for corporate leadership to go beyond ESG reporting and develop a corporate culture governing how ESG is implemented and embraced in their organisations.
There is as yet no single widely accepted standard for measuring a corporation’s ESG commitment.
The most applied approaches all build ESG scores on two main components: the ESG risks relative to those of other industries, and how the corporation manages ESG risks within its specific industry relative to its peers. The latter is more relevant.
Some ESG risks can be mitigated by design and strategic decisions, such as investing in eco-friendly assets and eliminating polluting elements from the processes. However, once this low-hanging ESG fruit has been picked, the residual ESG risks in the operations need to be managed.
SAYFR, a Norwegian safety specialist, has 20 years’ experience of using psychometric techniques to measure the maturity of organisational cultures and sustainability performance. It claims there are huge differences between corporations within the same industry.
The company’s data shows a significant difference between the 25% worst-performing companies (laggards) and the top-quartile performers (early adopters). The laggards’ incident frequency, injury frequency, non-compliance, and underreporting of failures is eight times higher (800%).
More information can be obtained by considering ESG’s older cousin — safety. While the difference in safety performance between early adopters and laggards is significant, in sharp contrast, the average annual industry improvements in safety performance are only in the order of 2-6%.
This means the laggards take decades to catch up with the early adopters, even though the early adopters’ safety strategies, best practices and routines are well known.
What this demonstrates is that implementation is a key bottleneck for genuine improvements – especially for the laggards.
It is easy to improve the ESG risk profile on paper. It is far more difficult to ensure that the actual execution across an organisation is in line with this ambition. Implementing ESG ambitions goes beyond writing a new procedure or defining new expectations for the employees.
Many employees already have enough to do to get their jobs done in a safe way. Hence, additional ESG goals may easily fall into the trap of developing double standards, ticking off an ESG risk reduction while congruent implementation falls behind.
An example of double standards is demonstrating social responsibility by donating to charity, while simultaneously turning a blind eye to the harassment of one’s own employees. Or seeing the gain from eco-friendly assets lost because of ineffective operations.
Such double standards create misalignment and distrust in corporate processes and leadership.
In turn, it becomes even more difficult to implement new ESG goals, thereby creating a downward spiral. Therefore, it is fair to assume that the differences between the early adopters and laggards within an industry will also significantly affect the management of ESG risks.
To build understanding and engagement and thus succeed with true ESG commitment, the whole organisation needs to be engaged.
By scrapping old school implementation techniques based on classroom training or traditional computer-based training and instead adopting digital and engaging tools based on transformational leadership, it is possible to scale and speed up effective implementation.
When everybody spends hours each day on their smart phone, why not allow employees to spend some time on something as important as ESG? A prerequisite for this is, of course, that the content must be interesting and engaging.
By taking this perspective, far from making it more difficult to reach everybody, the Covid-19 period has removed obstacles to the digital opportunities to reach everybody in an organisation, to innovations in learning, and in principle to more effective implementation.
The benefit of successfully managing ESG risks is, first, building a better world. However, the secondary goals go beyond access to funding and lower CAPEX.
By building a mature and congruent organisation culture that embraces ESG, there will be fewer injuries, less pollution, less waste, fewer claims, fewer fines, less downtime, less harassment, and much better collaboration.
When an organisation spends less effort in solving yesterday’s operational problems, more emphasis can be placed on tomorrow’s opportunities and challenges. Fewer problems result in improved operational efficiency with a significant impact on operational expenditures.
And finally, a high ESG score probably makes it easier to justify your price point in the market.
The takeaway is: embrace ESG risk management but make sure to bring the organisation and culture along to ensure congruent implementation.
Dr Torkel Soma is a partner and senior consultant at Oslo-based management consultancy SAYFR