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November 29, 2021

The Promise of ESG: Holding Corporate Actors to Account

The Promise of ESG: Holding Corporate Actors to Account

Accountability is the foundation for functioning democratic systems. Without a record of individual actions or the ability to be held responsible for them, these systems would crumble. We’re seeing a similar need unfold with the climate crisis. While human activity is the primary driver of global heating, the responsibility lies with a particular group that wields more power than others.

The Role and Responsibility of Corporate Actors

Given the scale and resource consumption of large corporate organisations, the impact of their operations has dire environmental and social consequences. A culture of consumerism and growth at any cost is fuelling this situation, and the need for change is urgent —including to make sure that we can bring people out of poverty without damaging the environment. Research suggests that two-thirds of greenhouse gas emissions globally can be attributed to just 90 companies. Make no mistake, corporate organisations cause the most human-driven damage to the planet. Industry is perpetuating the climate crisis through the devastating results of a purely growth-driven mindset - from income inequality and ozone layer depletion to deforestation and ocean acidification. And now, thanks to growing global awareness, stakeholders across the value chain —investors, customers, and regulators— expect corporate actors to understand and mitigate the effects of their operations. But can these expectations translate into behavioural change?

Understanding ESG Reporting

The transition towards sustainability needs more than expectations. It requires responsibility, transparency, and a focus beyond mere profit. Just as financial systems developed to hold those in power accountable through compliance and reporting, we are now adopting a more holistic measurement framework. Through this framework, we can analyse corporate actors' environmental, social, and governance standards to evaluate their commitment to sustainability. Often, ESG is a blanket term used for these reporting standards. But what exactly is ESG, and why does it matter?

ESG, which stands for Environmental, Social, and Governance, is a set of non-financial parameters used to assess a company’s sustainability. Although there are several ESG reporting standards, most share themes across stakeholders: 

  • Investors are betting big on sustainable companies, committing more significant capital and a higher tenure for businesses with a robust ESG strategy.
  • Customers choose responsible businesses and pay a premium for sustainable products and services.
  • Regulators and policymakers are expanding governance and compliance standards to include environmental and social impact under corporate responsibility.
  • Businesses are looking to work with sustainability-driven partners, often making it part of their procurement process.

How Corporate Reporting on ESG Helps

Today, our best efforts can reduce damage on the planet, not reverse it, even with sizable investments of money and time. Estimates put the cost at around $90tn in just the next nine years to limit the rise in global temperature to 1.5 °C (2.7 °F). If the expense seems enormous, the price of dealing with catastrophic damages will be that much higher. 

ESG standards help to focus necessary actions by identifying a clear set of priorities and setting ambitious targets. For instance, reporting standards may evaluate renewable energy use, carbon emission reduction, and recycling to account for environmental impact. The components of social reporting would consider aspects like ethical sourcing, employee safety, and community engagement. Examples of governance include the mechanisms behind executive compensation, transparent shareholder communication, and the diversity of the board of directors. A robust ESG strategy has seen enterprises secure investments, speed up innovation, and improve the livelihoods of the communities they serve. The ESG narrative holds that what’s good for the planet is good for business, too. 

ESG Strategies Could Be a Path to Better Businesses 

ESG is fast becoming a key differentiator and critical strategic imperative for companies. Its popularity comes at a crucial time. That said, complicated reporting frameworks, inadequate data, and disparate standards have meant that current measurement methods don’t present the complete picture. You’ll find cases where the focus is on reputational gains rather than accountability. In other cases, organisations don’t report because they don’t have the means to navigate the complex maze of ESG standards. Yet, despite these issues, the fact remains that a sound ESG strategy is a path to better businesses built to last on a planet needing better care. 

The world needs corporate actors to account for, reduce and mitigate their impact on the planet. ESG —if transparent, consistent, comparable, and informative— could be the tool that supports this transformation. However, it must integrate clarity and accountability to be effective. In the next post, we will look at the challenges with ESG standards through the lens of management, implementation, and reporting.