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In our ongoing series of Expert Q&As, we speak with Alison Taylor, Managing Director of Business for Social Responsibility (BSR), a nonprofit organization that works with companies and other partners on sustainable business strategies. She tells Nexis® Solutions that there is a trend of businesses prioritizing Environmental, Social and Governance (ESG) issues and the United Nation’s Sustainable Development Goals and contends that the use of data and third-party due diligence for business is becoming an “existential issue” for all companies.
First, increasing interest in environmental, social, and governance (ESG) issues from mainstream investors, not just socially responsible ones. Our financial services work has grown exponentially as banks and private equity firms focus on establishing systems to measure ESG risks and opportunities in acquisitions, corporate finance, and their own portfolios. The growth in interest is most striking on climate and diversity, but there is a broad, underlying shift in thinking as to how business interacts with society. This focus on sustainability from the financial services industry is directly impacting how seriously corporations take the issue. We are seeing companies increasingly request “ESG” rather than “sustainability” strategies, and this shift in terminology is a direct response to investor scrutiny.
We have also seen the establishment and maturation of internationally accepted frameworks to measure and frame sustainable business efforts: the Paris Agreement on climate, the Sustainable Development Goals, and the U.N. Guiding Principles on Business and Human Rights are a few examples. This is shifting the focus to how companies implement sustainability efforts inside the organization, and how they incorporate them into governance, management structures, and incentives.
Finally, we are seeing a convergence between issues of integrity and sustainability. Hyper-transparency means that companies need to behave as if anything they say or do might become public. Societal trust in business is falling, social and political activism is increasing (especially in the U.S.), and legal compliance is no longer a reliable proxy for reputational risk. All these trends require rethinking on how companies manage a broad range of ethical issues.
There is considerable evidence at this point that a focus on sustainability improves growth over the long term. It can help with employee retention, particularly of younger generations. It improves reputation and access to capital. Environmental efforts can reduce operating costs; efforts focused on societal value can improve license to operate. Conversely, ignoring sustainability increasingly signals that the company has a short-term mindset and an old-fashioned attitude holding that a business’ impact on society and the environment is just a matter of “negative externalities.” Such a mindset is no longer acceptable to many consumers, so businesses that think this way risk undermining public and investor trust.
The focus of sustainability efforts over the last several years has been to identify and act on issues that are in the interest of both the business and society: the “shared value” concept. This is a shift from earlier iterations of sustainability whereby it was regarded as philanthropic and divorced from the business, or as a risk-management and compliance effort. Today, the focus is on opportunity identification, and alignment with core business interests. Sustainability is a broad and evolving concept. Businesses should prioritize third-party due diligence and have a clear strategy that is aligned with core business interests—ideally demonstrating leadership on a few key issues.
Extremely important. The sustainability function inside companies remains poorly defined and inconsistent. Executive and board support is critical to driving visibility and traction for sustainability efforts. Sustainability leaders that have a strong track record in business tend to be more credible and are adept at driving the organizational change needed to make this work succeed. We believe that change management skills are highly underrated in the field of sustainability—subject matter expertise varies enormously, but a sophisticated approach to organizational dynamics is always going to help.
This is the tenth year of our annual State of Sustainable Business survey, which we refreshed to take account of the new trends we are seeing. I was surprised to see ethics and integrity emerge as the top issue for sustainability practitioners at companies, as this subject has traditionally been the domain of compliance teams. Still, although companies clearly understand the link between sustainability and reputation management, they are clearly not yet ready to tackle some issues that concern the public. Our partners at Polecat conducted social and online media analysis of ESG issues and found considerable attention being paid toward lobbying and business influence on politics—to an even greater degree than toward climate, water, or diversity. At the same time, directly addressing concerns over political influence did not show up as a priority among companies.
It was also interesting to see diversity and inclusion flagged as the second-highest priority, alongside the finding that 41 percent of companies have so far done nothing to address the #MeToo movement. There remains a lack of focus on such major societal issues as inequality and inclusion, which is troubling, given their dramatic effect on our lives.
I think it may reflect the overwhelming media and business focus on this issue. Companies are getting to grips with the fact that the use and misuse of data and technology is an existential issue for most businesses, not just technology firms. Compelling changes are happening in real time, and the future is highly uncertain. There is no clear playbook for how to proceed.
AI and big data have the potential to transform supply chains, customer interactions, market knowledge, and much more. Abusing this new capability (intentionally or not) can violate a broad range of human rights and constitute deeply unethical behavior. We are at the start of efforts to understand, regulate, and manage the capabilities of this powerful new technology.