WHEN the United Nations introduced the 17 sustainable development goals (SDGs) in 2015, the expectations on corporations to play their part in spreading prosperity and peace across the planet had been heightened.
Perhaps this is the reason why discussions about environmental, social and governance (ESG) are considered a norm in boardrooms nowadays. In fact, many corporations are embarking on various ESG projects of their choice to manage risks and improve their level of competitiveness and enhance social standing.
In addition to that, climate change, which relates the efforts to save the planet which is getting warmer, is getting more attention from various parties, including regulators. Financial institutions, for example, are required to comply with certain business and reporting requirements in ensuring that they and their borrowers accept more responsibilities in addressing the risks of climate change.
This shift of focus in assessing risks would reshape how businesses would be financed in the near future.
One might wonder why corporations are now looking beyond the interests of their shareholders when making business decisions. By bringing the impact on the society and environment in business considerations, corporations may no longer pursue profit maximisation as their ultimate business goal.
The idea of corporations pursuing triple bottom line, profit, people, planet is not new. Since it was coined in the mid-90s, the idea has becoming more acceptable especially when the distribution of wealth since then skewed towards a very small number of capital providers and the environment had been exploited in such ways where the consequences can no longer be ignored. Even in Malaysia, flash floods are getting more frequent as our natural forest is depleting due to logging and other exploitations by humans in pursuing profits.
Whether we agree or not, the shift from shareholder capitalism to stakeholder capitalism is happening in the marketplace. In addition to shareholders, other parties such as governments, civil societies, customers, workers and affected communities have been able to grow their significance to influence corporate decisions.
History has suggested that the shift in behaviour of corporations could be due to two reasons.
First, to comply with regulations and standards as they do not have any other choice. Second, which resulted in more broad and sustainable behaviour change, is the sincere belief in the hearts and minds of board of directors and management that considering the interests of society and taking care of our environment would lead to better and sustainable business.
For the board and management to sincerely embrace the concept of ESG, the people in those positions must be able to comprehend the concept and able to visualise how commercial interests could be enhanced by being a good corporate citizen and their corporate conduct should result in the betterment of their stakeholders and the environment. So, in addition to their business acumen, their beliefs and values matters.
Believing is not enough. ESG has to be embedded in business strategy and business processes and incorporated in metrics and targets which define business performance and risk management.
In pursuing the triple bottom line ideals, corporations have to ensure the whole supply chain is aligned with the principles. This will create larger and wider impact. All of these are outcomes of good corporate governance.
The dedication of directors and management to the cause is also important as the journey to pursue business resilient and sustainability could be long and full of challenges. While shareholders and investors who are becoming activists of ESG are growing in number, many still consider corporate performance purely on financial basis. Some need to churn profits, so that they could pay dividends to their shareholders, unit holders and depositors. Hence, boards must be able to convince their shareholders and investors that the pursuit of SDGs and ESG are for their best long-term interests, not otherwise.
For the society and environment to be given due consideration in corporate decisions, the governance part in corporations must be set right first. Positive impact on the society and environment is a natural outcome of good corporate citizenship.
Therefore, wouldn’t it be more appropriate for the “G” to take precedent over the “S” and “E”? Shouldn’t it be GSE instead of ESG?
Source: https://themalaysianreserve.com/2022/10/27/esg-is-the-sequence-right/