What’s good for the planet is good for business, so the saying goes. But with the world recoiling from a seemingly never-ending series of macro shocks, is the business case for Environmental, Social and Governance (ESG) still intact or is it time for a rethink?
Louise Chaplin, Partner and Head of Board Practice at Eton Bridge Partners sat down with Zoe Howorth, Non-Executive Director at International Schools Partnership (ISP), Paragon Bank, Water Babies and AG Barr, to debate the issues around ESG within businesses today.
A cooler climate for ESG
A global pandemic, war in Europe, energy insecurity and now turmoil in the Middle East – amidst such tumultuous world events, is ESG slipping down the agenda? Once the darling of investors and a buzzword for corporate responsibility, ESG is facing something of a backlash. After years of strong growth, Reuters reported that ESG funds saw their first net investment outflow for over ten years in 2022.
Company balance sheets, government chequebooks and consumers’ pockets are feeling the pinch, and that’s focusing attention on how to balance the long-term payback of ESG initiatives against their short-term costs.
“When you have tension around financial performance and investing in long-term planet and people initiatives, it is tough and it does require an alignment to principles and getting around the table and having the right conversations,” says Zoe.
ESG has always been about ‘doing the right thing,’ but in an increasingly polarised world, there is ferocious debate about what the right thing is – protecting the planet’s future or ensuring short-term energy security through more oil drilling, forcing householders to make their homes greener or helping people with the cost of living?
A growing ‘anti-woke’ movement meanwhile has ESG in its sights with the term ‘green-hushing’ being coined to describe how a company may keep its climate action activities under wraps in order to avoid a backlash from certain parts of the public. It’s not just the political fringes that are questioning the direction of travel – the UK ban on the sale of new petrol and diesel cars has been pushed back until 2035 and the EU recently watered down sustainability reporting requirements.
Are businesses playing the long game?
Amidst all the noise, is ESG still a key driver of competitive and financial outperformance? The signs are that, yes, businesses are still on board. According to the KPMG 2023 CEO Outlook, almost three-quarters of CEOs said that ESG was now ‘fully embedded as means of value creation,’ with 58% expecting significant returns from ESG investment in three to five years.
While governments and investors may be backpedalling, businesses seem more prepared to take the long view on ESG, looking through short-term choppiness to develop new and sustainable ways of working. In doing so, these ESG champions may not only attract a new generation of talent and customers, but also protect their future profits from the risks of not investing in ESG.
As Zoe points out; “we know that climate change is happening and so I think that positive momentum in a managed way will continue as well as a focus on elevating the human condition and purposing things like Artificial Intelligence (AI) to help us to do that.”
Fully commit for long-term success
The long-term business case for ESG may remain compelling, but how do we get there against a backdrop of higher borrowing rates and price-conscious consumers reluctant to absorb extra costs? “Everybody is finding it tough out there and I think there is an expectation which I think is right, that businesses will step up and do the right thing,” says Zoe.
She outlines three key cornerstones to a successful ESG strategy:
- Ensure leadership is aligned to ESG and build sustainability into everything you do. This is key to managing tensions around building profits whilst also doing the right thing for the planet and people.
- Data is crucial – invest in the right partnerships to help source the right data and then implement the right processes to share that data with management to underpin a quality conversation about where you are and where you’re going.
- Develop affordable and actionable transition plans – build on your best practices, roll out and be very intentional about it with a clear roadmap.
In terms of focus, the ‘E’ part of ESG understandably attracts a huge amount of attention, but Zoe points out the other two pillars remain extremely relevant.
Younger generations value working for a business that has a clear purpose and creates positive scenarios for its stakeholders – the ‘S’ and ‘G’ parts are vital here.
Zoe also notes governance provides a forum to talk about issues such as anti-slavery and anti-bribery; “it’s a great opportunity for boardrooms to be reviewing those policies.”
It’s an interesting development that businesses are emerging as potentially more committed to the long-term work on ESG than governments, though perhaps not surprising given the short-term horizons of politics. Businesses have keen survival instincts – no business wants to become a dinosaur – and it would seem that those survival instincts are telling them that ESG is still good for business.
My thanks to Zoe for sharing her insights into this fast-moving and extremely topical area.
At Eton Bridge Partners, we help clients find best-in-class leadership for the boardroom and have a strong track record of acting as trusted advisors to executive boards. Please get in touch to continue the conversation.
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