ESG: Business imperative or Tick-Box Exercise?

There is 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.

At a societal level, lockdowns and social distance have prompted questions about how best to design our cities, our buildings and our children’s education. As individuals 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’s 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 is often seen as the means by which other industries will achieve their own goals for greater sustainability. When used responsibly, technology brings unprecedented benefits to many, fundamentally changing business models and even societies, accelerating all kinds of social good.

However, 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. These issues need to be acknowledged, debated and addressed to maintain a healthy society.

Investors agree

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.

There are plenty of indications that this is more than a social-media-led flash in the pan. 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 MorningStari, sustainable equity funds 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 combination of regulation, investor action, NGO pressure, company culture and consumer expectations is a potent mix. 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’.

But there is still that nagging question: are we, in effect, simply entering the age of CSR 2.0? The honest answer is that, yes, there is some risk that superficial symbolism can be mistaken for genuine action.

But that is no reason to dismiss the ESG phenomenon out of hand. Whereas CSR was very much driven from marketing departments, ESG is embedded into the actions and decisions of the entire organisation, and starts right at the top. The move towards becoming more genuinely responsible corporate citizens involves and affects the whole business. It is integrated into the company’s strategy and decision-making: which is why almost half of FTSE 100 companiesii have linked executive pay to ESG targets.

In the end, CSR fell from favour because it didn’t deliver authentic change: it was the proverbial tick-box exercise. ESG is significantly more than that – it demands action and transparency, often involving deep, systemic change within and between organisations.

Good business

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 is about building and protecting trust with all stakeholders rather than doing the minimum necessary.

And it is good business. Companies that embrace ESG are already considered more resilient to market shocks, and some have outperformed their peers through 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.

About the Author

Joe Baguley is VMware’s Vice President and Chief Technology Officer for EMEA, joining VMware in July 2011. He helps develop and communicate VMware’s strategy and vision with customers and partners, using his wealth of experience to help organisations reduce costs and better support users and business needs. As part of VMware’s Office of the CTO and its representative in EMEA, Joe assists VMware’s customers in understanding how to use today’s advances in technology to deliver real business impact and plan for disruptive technologies of the future, as well as working with them to inform VMware’s R&D processes. 

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