ESG In North America: Is “S” The Hidden Iceberg For Corporates?
The call for corporate America to respond to our national social conversation has grown immeasurably louder in 2020 and is already breaking new ground in 2021. Last year saw corporations scramble to respond to a raft of social emergencies, whether the distress caused by Covid-19, the anguish of the racial justice conversation, or the stark reality of climate-related destruction. The early weeks of 2021 have also prompted an unprecedented corporate stand for political and ideological soundness, amidst more upheaval. This all raises a question: there is an undeniable role for corporate America to play in the social response, but what should it be?
Chief Sustainability Officer
Societe Generale Americas
The call for action is powerful: the very words “social justice” tell us we are either just or unjust -- inaction becomes immoral, and echoes with a heavy historical burden. But loud as the call may be, a response that is constructive and effective requires nuance. Our national debate continues to hinge on inequality, which will require addressing intolerable and unwanted imbalances of power (whether economic, legal, political, or cultural, all of which are currently exacerbated by Covid-19). A genuine solution means finding a different balance, which also means challenging the assertions of legitimacy and authority that exist today.
We need principles for action, new measurements, and the meticulous crafting of a long-term vision. In achieving this, and much like in the “E” of ESG, a corporate social response should be public (part of market communications), permanent (part of a company’s long-term strategy and self-defined image), meaningful (manifested in its products, governance mechanisms, capital allocation, planning, supply chain, and workforce), and useful (designed specifically to meet expressed societal needs). The precise shape of this response then becomes emergent, adaptable and durable.
So why then have corporate responses thus far seemed hesitant? Over the last twelve months, we have seen widespread renewed commitments to diversity and inclusion, philanthropy, and employee health and safety. But a robust body of academic research already points to the fact that most D&I programs are ineffective at reducing bias (or worse, can increase bias); philanthropy rarely moves the needle on corporate financial performance or market perception and is often safely housed in a sister organization; and employee health and safety is also arguably an expected minimum cultural standard for any employer in leading industrialized nations. A number of recent well-publicized debates have also raised awareness of how much corporations impact our social fabric, be it from customer management tactics, legislative lobbying prowess, skillful tax and accounting maneuvers, or wealth distribution.
The issue is not one of intent, but of framing. Part of the power (and therefore hesitation) in a wide-ranging social response is that it also requires powerful change within corporations. What kind of change? The “E” of ESG gives us useful cues. One of the most powerful drivers of “E” is climate science, which tells us with glaring precision that de-carbonization is a vital, urgent and colossal undertaking. By contrast, “S” factors lack a common language, and will likely remain more subject to local interpretation because they are more tied to local history, laws, customs, and ideology. Beyond the question of taxonomy, however, a bigger problem hides in plain sight. At the level of individual corporations, “E” has established a set of commands: identify your historic contribution to environmental deterioration, acknowledge the issue in a public mea culpa, and rectify it under close supervision. When applied to “S”, these ideas suggest a daunting set of choices.
Put bluntly, in the broad narrative that permeates many corporations, share price has become the lionized measure of value. This mindset has significant consequences in that “higher price” can become indistinguishable from “higher value” (when in fact price also moves through choices like share supply and accounting expression). Share buybacks and the like are given the same worth as gradual and painstaking improvements in the business, and a growing mismatch in rewards for output across the firm immediately becomes a marker of success. In simple terms, price inflation means the same as higher production, and the in-house inequality it produces becomes a virtue. Is it any surprise, then, that being asked to address external inequality can feel awkward?
There is a path forward that is both bracing and positive, and that changes the current call to action into a drive towards shared meaning with whole-hearted and unambiguous commitment. The right principles for action (public, permanent, meaningful, and useful) also make decision-trees much more obvious at all levels of an organization. And as we widen our ESG aperture, the energy transition will also only accelerate from here, and these reflexes will become reinforced as corporations compete to lead each other through the vast technological, financial and cross-sector changes that will be required. “E”, “S” and “G” will then have a shot at leaving us with genuine markers of shared success.
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