ESG: Business imperative or tick-box exercise?

SPONSORED: ESG is going mainstream and challenging past assumptions about what corporate responsibly means, says Lorna Hardie, Regional Director, VMware Sub-Saharan Africa

Lorna Hardie, Regional Director, VMware Sub-Saharan Africa

There’s nothing like a global pandemic to accelerate social and business trends. The past 18 months have seen greater levels of digitisation throughout all kinds of industries, in all kinds of organisations for all kinds of tasks. Having been granted a glimpse of their colleagues’ private spaces and family lives, organisations are reconsidering old ideas about employee productivity and flexible working.zw

At a societal level, lockdowns and social distancing have prompted questions about how best to design our cities, our buildings and our children’s education. Despite retreating from the social sphere and living in more atomised bubbles, we also became more aware of the fundamental interconnectivity of the world we live in.

That our actions have consequences, that we have a mutual responsibility for our wider communities, that life doesn’t come with a chance of a do-over - all these ideas played out in real life and across our screens every day. So it should come as no surprise that awareness of wider social concerns were supercharged during the pandemic. Social activists and workers’ rights campaigners found their voices amplified. Acknowledgement of the climate crisis and the need for action got a turbo-boost. And the nascent movement towards a more stakeholder-centric view of business shifted up several gears.

In the era of pandemic, Environmental, Social and Governance (ESG) came of age – and is reshaping expectations of business’ relationship with and responsibility to the societies in which they operate.

Saviour or sinner

When it comes to ESG, the technology sector has a mixed reputation. On the plus side, digitisation and all that it entails is often seen as the means by which other industries will achieve their own goals for greater sustainability.

There is plenty of truth in that. When used responsibly, technology brings unprecedented benefits to many, fundamentally changing business models and even societies.

However, there is a darker side. Technology also introduces new threats to privacy and security, creates new social problems like screen addiction, and demands ethical debates around the power of AI, free speech and democratic participation.

The tech sector is a significant consumer of energy. The global power draw from the world’s datacentres is estimated to be around 1.5% of total worldwide electricity production.

Businesses are now proactively and positively contributing to a wide variety of pressing issues from climate and sustainability to boardroom and workplace diversity and equality. This is not just a concern for their own internal operations, but extends to their global supply chains – aware that effectively outsourcing negative impacts can no longer be hidden or justified.

There are plenty of indications that this is more than a social media-led flash in the pan. Even back in 2018, research showed that 87% of people believe most companies exist to create value for multiple interests in society, rather than just; 94% said companies can shape a better society, while 68% believe it's more important to know how companies operate than what they sell.

Perhaps the most convincing piece of evidence as to the significance of ESG to the corporate sphere is that investors are starting to recognise and respond to it. According to MorningStar , sustainable equity funds (i.e. those that focus on companies that have committed to ESG) were outperforming traditional equity funds at the end of 2020, and the amount invested in ESG funds has more than doubled in the past year. ESG funds captured $51.1 billion of net new money from investors in 2020 – up from $21 billion in 2019.

Authentic change

The spotlight is now firmly on businesses, which now have an opportunity to set the bar for doing ‘well’ at the same time as doing ‘good’.

The question remains: isn’t this just a load of greenwashing? Are we simply entering the age of CSR 2.0?

Yes, some companies may well be doing just that. Hashtags and ribbons cost nothing and require little real effort. But whereas CSR was driven by marketing departments, ESG is embedded into the actions and decisions of the entire organisation. The move towards becoming more genuinely responsible corporate citizens involves the whole business: its purpose, products, management, operations, employees, finance, supply chain, HR, IT, customers, marketing, sales and more. It is integrated into the company’s strategy and decisionmaking, which is why almost half of FTSE 100 companies have linked executive pay to ESG targets.

In the end, CSR fell from favour because it didn’t deliver authentic change. ESG demands action and transparency, often involving deep, systemic change within and between organisations.

The other big difference is that CSR was often an add-on to the main business of turning a profit. It was not really considered as a core factor in the way that profits are made. It’s the difference between sponsoring a tree-planting project in a local park and achieving net-zero emissions from company operations and those of customers and partners; between offering work experience to local schools and building a future that is accessible and inclusive.

And it’s good business. Companies that embrace ESG are already considered more resilient to market shocks, and some have outperformed their peers through the pandemic. The ramifications of not embracing ESG have become very real as have the risks of losing investment, reputation, customers, employees and business opportunities.

The way organisations engage with their global community is no longer just a page in the annual report, or a talking point in investor relations meetings. It is a way of doing business. And companies are taking it on, not just because it is good for the bottom line – although it is – but because it is the right thing to do.

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