Corporate reputation: Why businesses must demystify ESG to become better corporate citizens

Corporate reputation: Why businesses must demystify ESG to become better corporate citizens

The period of Covid-19 has been a time of radical social and economic change. Companies have changed their operating models, while the agility of working policies has been challenged as a result of the pandemic. Recently in the wake of the Black Lives Matter movement, many CEOs have had to publicly address social issues and anti-black racism measures. All this activity loosely falls into the category of corporate ESG (Environmental, Social, and Governance) initiatives.

The unique combination of circumstances we’ve recently experienced has made business re-evaluate wider societal initiatives, which will hopefully result in a sustainable and more equitable society. This is critical at a moment when businesses and investors are expected to actively contribute to achieving the UN Sustainable Development Goals and making progress toward the 2030 agenda. Throughout this period of change, it has become clear to many observers that badging all these acts of “good corporate citizenship” under the banner of ESG isn’t quite fit for purpose anymore.

There is a tendency for CEOs to use the ESG acronym, which first was popularised 15 years ago in very different times, as a catch-all term for anything that is not propping up the bottom line. It renders the concept of ESG redundant for progressive corporations, which are forced to talk about their social responsibility credentials through a single prism. This approach was and is often confusing – it doesn’t provide a clear view of corporate contributions on such critical matters.

In order to standardise ESG metrics, the World Economic Forum, has recently released a set of universal metrics that allows companies to measure stakeholder capitalism that business can report on regardless of their industry or region. This is a step forward, but the reality is that this type of framework will take years to be widely adopted and isn’t the silver bullet for demonstrating corporate social responsibility

The advent of social media has made executives well aware of the fact that being out of sync with society at large can result in a backlash from customers, employees or even the regulator. It can hit the bottom line, hard. A company’s societal impact has become critical from an investment and revenue perspective.

Sophisticated investors, such as asset managers and private equity funds, are used to reading through dense ESG reports and scrutinising extra financial information. These groups have the added benefit of being able to query management teams at ESG roadshows, while having the tools to evaluate a business’s performance indicators against their peer group. This extensive process of evaluation of a company’s wider societal contributions, highlights the problem of understanding the role that the business plays in society. As pointed out by Portland’s survey* of 1,000 UK adults, which found that 43% of consumers have little to no understanding of what companies mean when referring to ESG.

Some might argue that ESG reports are only produced for investor, NGO and government stakeholders. But how can an entity position itself as a force for good without the general public understanding how they are progressing without reading a dense ESG report? It’s only by employing radical simplification that firms will be able to properly amplify the messages they wish to convey more widely.

Most stakeholders evaluate a business’s contribution through issues that are easily digestible. Our research found that only one fifth of UK consumers view a company’s ESG performance as important when buying goods and services from them. However, we know that public sentiment towards the reduction of plastic waste has influenced major retailers’ behaviour. For instance, Britain’s biggest retailer Tesco has pledged to remove one billion pieces of plastic from products by the end of 2020 as it seeks to reduce its environmental impact. This Tesco announcement was widely covered and welcomed by NGOs (e.g. Greenpeace), customers and political stakeholders. A clear demonstration that not all ESG initiatives are created equally.

Our poll asked consumers to rank the importance of different ESG pillars and found that societal (S) issues topped the list, followed by corporate governance (G) and then environmental issues (E). This might be counter intuitive, but governance is very much in the public consciousness due to the on-going debate around the taxation of multinationals. Even within the environmental subset there is a huge variation between the importance placed on climate change impact of companies compared to natural resource usage. This illustrates that bundling wider issues under a single letter doesn’t demonstrate progress in a meaningful way to an organisation’s stakeholders.

To reach all stakeholders, not just investors, companies need to stop talking about ESG if they want to successfully secure understanding of their practices and work. Businesses need to carefully understand through qualitative and quantitative research (surveys and focus groups) what information is meaningful to their customers and helps them build public trust.

There isn’t a one size fits all approach – the perceived importance of championing initiatives will vary from company-to-company. As an example, we know that all sectors are impacted by climate change, but it’s natural that we scrutinise the climate action of oil & gas majors more than, say major online gaming companies. Nonetheless, this doesn’t mean that gaming companies shouldn’t talk about their efforts to tackle climate change, but this information might be of interest to fewer stakeholders.

The unbundling of the ESG acronym allows for greater transparency and understanding about the initiatives that are happening. This protects these companies from scrutiny from activist groups, governments and NGOs. For businesses, particularly consumer facing ones, talking about ESG as a category dilutes their initiatives and progress across each of these areas.

Forward-thinking companies already take a more holistic approach, which looks at their contributions to the economy and society as a whole. These types of frameworks allow them to assess how their positive impact is perceived by external stakeholders, which can help guide them on corporate communications.

Ultimately talking in simple terms to the right stakeholders about facets that fall under good corporate citizenship will help businesses improve their reputation and achieve cut-through. For companies that simply rely on ESG reports as the only mechanism of communicating their wider efforts, run the risk of subscribing to the orthodoxy of ESG without keeping in mind what this framework was originally designed to accomplish.

* Portland polling team survey conducted 15.07.2020. Total sample size n=1,000 online UK adults, aged 18+. Sampled to the UK ONS 2016 census for age, gender and region.

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