“The Starting Point for a Successful ESG Strategy”
The importance of DNA and values in the ESG conversation
We were delighted to attend the Capital Markets Day of a client in the investment sector this week, which successfully expressed the extent to which ESG has become embedded in its DNA, and how positive this has become for the performance of their business. While they acknowledged that the wide range of obscure acronyms for ESG metrics and frameworks can initially present a muddled landscape to navigate, they discussed how they engage effectively with these structures as part of their ongoing work on ESG. We were also interested to learn about their own ESG rating system for investment selection, and the point that ESG has helped them make better investment decisions and become a stronger business.
It is now widely accepted that ESG is critical to investor selection and this case study, for us, threw into sharp relief the difference between those companies who have successfully put ESG at the heart of their business and those who regard it as onerous tick boxing and, in a few cases use it actively to “greenwash”. Greenwashing (not to mention green-hushing or green-botching) remains front-of-mind for a critical media audience and the level of scrutiny will only get more intense. With any laziness on labelling and scoring at risk of being embarrassingly exposed, there may be consequent negative impact on corporate reputation.
On labelling we recall how The Guardian found that more than 90% of the rainforest offset credits certified by Verra (one of the world’s leading certifiers of carbon offsets used by Disney, Shell and Gucci) appeared not to be genuine. Elsewhere, the FT has discussed the “soul searching” in the B Corp movement, provoked by the inclusion/certification of companies like Nespresso with well known ESG concerns. That article highlights the tension created by the application of the B Corp label to many smaller companies which adopted the standards earlier, and what is perceived as an emerging focus on adding multinationals to the movement and “trying to get them to be ‘less bad’ rather than ‘transformationally good’”.
Political and investor pressure has given rise to an increasing array of measurement tools, which has had a positive impact on the investment community with the development of more powerful and effective advocacy for ESG outcomes. However, there are many ESG metrics and frameworks to keep up with and this host of tools and frameworks can lead to the development of a scoring mindset, where more attention is paid to the scoring than the substance of the ESG activity itself.
This has been the subject of much discussion, and is where Boards can sometimes part company with the ESG agenda because they wish to avoid the risks of unwarranted accusations around greenwashing, and arguments around box ticking. In some cases, Boards feel the need for ESG progress and compliance, which can become commoditised and process-driven, is somehow at odds with their corporate mission, or that the connection has been diluted, or even lost. The still-growing influence of the ESG agenda in the investment community, alongside continued adoption of ESG measurement and standardised process, has heightened the risk that ESG activity can become separated from a corporate’s “purpose” and values in the effort to achieve compliance.
“What is the most helpful starting point for engaging with the ESG agenda?”
All of which begs the question - what is the most helpful starting point for engaging with the ESG agenda? While the measurement tools themselves are welcome, to be effective the conversation may most helpfully start with an assessment of the values and DNA of an organisation, which can be particularised at Board level, expressed through the activity of the executive, and then communicated to broader stakeholders through the lens of these ESG measurement tools and frameworks.
Having reflected on the values and DNA of the organisation, Boards and executives can then determine the activities they wish to engage in as part of their organisation’s broader “purpose” obligations. ESG compliance may then ultimately be seen as a reflection of the conscience of the company itself, shared by internal stakeholders and then transmitted more broadly. Consideration of measurement and labelling then becomes meaningful.
When we asked the question on the most helpful starting point for engaging with ESG, we were not advocating a simple linear journey of evaluation with a beginning and an end. As corporates and their environmental and social contexts evolve, there will be reciprocating analysis of values and DNA to ESG activity, and then analysis against benchmarks, but a searching conversation on values and DNA is the right place to start for navigating the issues around labelling and measurement.
First published: 17 March 2023
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We began the Vico Views series as an expression of the team’s thoughts on the issues that we monitor in the course of our work. Internally, we have a short Vico Views type discussion every morning in our daily briefings, so we wanted to take the most interesting of those subjects and create a format to share them externally as well.
