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The rise of stakeholder capitalism is being thrown into sharp focus through the ESG lens. Each stakeholder group encompasses its own risks and opportunities, and businesses need to be able to track and respond to them all.
In today’s boardroom, business strategies are no longer designed for the benefit of shareholders alone. A shift to a broader stakeholder model is pushing corporate direction and business decisions towards benefiting all those with an interest in the organisation. Some 55% of CEOs believe that long-term sustainable success means looking beyond purely financial growth. This is the root of stakeholder capitalism, underpinned by the principle of shared value creation.
This rings particularly true in the arena of environmental social and governance (ESG) topics. The risks and opportunities presented by an organisation’s ESG performance vary between stakeholder groups, affecting overall ESG profile and consequent stakeholder engagements. In 2018, 22% of directors at the NACD Global Board Leaders’ Summit reported directly linking ESG to corporate strategy.
When the impacts of ESG considerations on different stakeholders are understood, companies are better placed to respond to a shifting business landscape, and in a position to continuously improve performance. In the long term, transparency in corporate governance, weight of environmental footprint, and how socially responsible an organisation is, all factor into how well it can service different stakeholder needs.
In the future, ESG issues will define the approach to stakeholder engagement, especially in the wooing and retention of customers. Many consumers now expect companies that supply goods and services to be ethically aligned to their own priorities. Executive pay, treatment of employees, sustainable sourcing and environmentally conscious practices all play a part in this. Research by Nielsen showed that 73% of consumers would be willing to change their consumption habits to cut their environmental impact, and 81% believed corporations should help improve the environment. Boardrooms are listening, with 71% of CEOs believing it is their responsibility to ensure ESG policies reflect customers’ values.
Employee relations have been in the news throughout 2020, as the unprecedented global health crisis forced businesses to revaluate their workforces. ESG issues coming to the fore fell under the governance umbrella: how employees were managed, communicated with, protected, supported in new working environments, or made redundant. Going forward, these issues will be just as important, driving the attraction and retention of talent in a competitive marketplace. Research by Marsh & McLennan into ESG as a workforce strategy found that employers ranked highly for employee satisfaction were more diverse and made a greater effort to understand employee perspectives. And staff don’t just want to be treated well: they want to work for companies that share their values, with Mercer’s Global Talent Trends Study reporting that 75% of fulfilled employees felt they worked for a company with a strong sense of purpose.
Long-term financial performance is also linked to ESG profile, and shareholders remain important when weighing stakeholder priorities. Corporate sustainability is pinging ever louder on investors’ radars – unsurprising given that ESG-focused investment funds outperformed the S&P500 in 2020. Deloitte expects ESG assets to see a 16% compound annual growth rate, reaching almost $35trn by 2025. ESG investing is favoured for improving long-term returns, decreasing investment risk and boosting brand and reputation. Responsible investing is no longer a nice to have, but a sound financial strategy. Organisations offering attractive ESG investments will benefit from the capital controlled by the 65% of asset owners and managers already aligning their investment framework to the UN’s Sustainable Development Goals.
Just as potential shareholders are focusing on sustainability reporting to guide their investment strategy, so NGOs are tracking the reported ESG performance of corporations to shape their campaigns. Support work in local communities, charitable activities and sustainable business practices will all swing NGO opinion in their favour. Even greater traction will be gained among this stakeholder group by not falling foul of their individual interests. The ease of achieving this will vary by industry – petrochemical companies will have a harder job than food producers, who have more routes available to score well in ESG ratings. Nonetheless, there are differentiators even within comparable sectors that can produce heroes and villains. In 2019, Unilever was the brand most praised by NGOs, for its leadership on climate change and habitat protection, while Nestle was the most criticised, due to its plastic packaging policy.
ESG disclosures will also come under increasing scrutiny from regulators, becoming statutory rather than voluntary. The Governance & Accountability Institute recorded that coming into 2019, just 14% of the S&P 500 declined to publish sustainability reports. Little wonder, in light of the 158% increase in ESG regulation in the UK over the last three years, and the 145% rise in the US and Canada. Policymakers within government and regulators are under pressure to drive a green recovery following the coronavirus pandemic, and making corporations align their behaviours to that aim will be a massive part of this.
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