Credit Management May 2022

ESG
SOCIAL VALUES
What’s in it for the ‘S’ in ESG?
AUTHOR – Aniela Unguresan
CORPORATE life is full of many
acronyms and ESG is just one
of them. Simply put, it stands
for Environmental, Social, and
Governance, and investors are
increasingly applying these
non-financial factors to their analysis of
organisations to identify material risks and
growth opportunities.
First coined in 2005 at the Who Cares
Wins conference in Zurich, ESG factors were
positioned from the outset as material aspects in
the context of longer-term investment. But while
ESG has been around for almost two decades, it
only seems to have moved from niche into the
mainstream in the last two or three years.
THE RISE OF ESG
ESG’s rise to prominence isn’t an overnight
sensation. Rather, it can be credited to three key
factors, each of which reinforces the other.
Firstly, capital markets are now very much
interested in ESG as a measure of sustainable
business performance. As capital moves
according to risk and opportunity profiles, so
organisations are reacting by changing their
focus. Significant capital is now being invested
in ESG-orientated funds and this inflow has
become a major driver of the move of ESG into
the mainstream.
The rise of the ‘E’ in ESG can also be attributed
to the current and legitimate preoccupation with
the environment; this too has driven processes
aligned with capital investment.
But there is a third underlying factor to
consider. ESG was set up initially as a ‘do no
harm’ type of framework. In other words,
organisations were examined in the context of
their financial results and how they ensured
that those results did not come at the expense of
Environmental, Social, and Governance issues.
But lately, and in line with the concept
of shared value coined by Michael Porter in
2009 which ignited the conscious capitalist
movement, the ambition has shifted from the
idea of ‘doing no harm’ to ‘this world is a better
place because a company is in it.’ In other words,
a net positive effect as Paul Polman – the CEO of
Unilever from 2009 to 2019 – describes it.
Society’s expectations of business have
changed dramatically, and organisations now
need to ask, ‘how can we make a positive
contribution to the world by virtue of our core
business?’ It is worth emphasising that this
is indeed a philosophy that is anchored in the
core business of an organisation. Rather than
being an afterthought or a layer on top of the
organisation’s core purpose, it is both vital and
fundamental to it.
Organisations
needed to take drastic
action with regards
to their workforce,
they also needed to
dramatically rethink
their supply chains,
their impact on
employees that
remained, and
their impact on the
community.
A CORPORATE BAROMETER
It’s interesting that the definition of ‘S’ has
morphed in recent times. Initially it related
primarily to human rights, but now it
encompasses labour issues, diversity, equity,
and inclusion (DE&I), workplace health and
safety, and product safety and quality, including
supply chains
So where ‘S’ was once related to ‘social’, we
believe that this narrow definition could be
expanded to stand for ‘stakeholder’, putting
at the centre of the ESG concept stakeholder
welfare.
Moreover, when ‘S’ practices amongst
organisations are examined, it is apparent that
they form an accurate barometer of corporate
culture.
We can see that organisations that have a
strong and a shared culture see ‘S’ practices
that are also strong because there is a common
sense of purpose and reason as to why that
organisation exists. Conversely, where neither
common sense of purpose or a shared culture
exists, ‘S’ practices of organisations tend to be
rather poor.
From an investor perspective, this makes
‘S’,one of the most subtle, yet very powerful and
relevant, measurements of risk associated with
reputation and sustainable business success.
AN INDIVIDUAL LETTER COUNTS
There are three letters that make up ‘ESG’ and
while there is a shared understanding of the
meaning behind the letters ‘E’ and ‘G’, when it
comes to the ‘S’, investors have a shakier view of
what it means and how it should be measured.
The point was well made by a 2019 study, from
BNP Paribas – the Global ESG Study. It found that
46 percent of investors from the 347 institutions
surveyed said that the ‘S’ in ESG was the most
difficult to analyse and embed in investment
strategies.
However, the pandemic and all its devastating
effects on many different levels moved ‘S’ into
the spotlight. Organisations needed to take
drastic action with regards to their workforce.
They also needed to dramatically rethink
their supply chains, their impact on employees
that remained, and their impact on the
community.
So, where once we focused almost exclusively
on defining what ‘E’ and ‘G’ meant and how
they could be measured, we are now doing
the same with ‘S’. And this is because we now
have the irrefutable evidence that ‘S’ does
indeed matter, and it is ‘material’ when it
comes to understanding an organisation’s risk
and opportunity profile. It’s a key requirement
to unlocking capital flows and investment,
Brave | Curious | Resilient / www.cicm.com / May 2022 / PAGE 10