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Once CSR was the clarion call for companies looking to do good, and consumers and investors seeking socially conscious organisations to do business with. But in an increasingly complex landscape, with myriad standards and criteria to judge corporate behaviour against, it has fallen out of step with the sustainability agenda. Enter ESG, the latest evolution of the intentions behind CSR, which provides a framework for greater transparency, greater efforts, and greater good.
In a recent blog, we mapped the progression of sustainability as a business issue into the wider concept of environmental, social, and governance (ESG) criteria. But ESG didn’t leap into being in a single bound. Its growth is rooted in corporate social responsibility (CSR), which marked the starting point for businesses taking ownership of their impact on society.
The role of business in society has been discussed and expanded upon over the 50 years since Milton Friedman’s landmark 1970 essay, ‘The social responsibility of business is to increase its profits’. Since then, and picking up exponential speed in the last two years, there has been a shift towards a wider understanding of how corporate decisions affect all stakeholder groups – not just shareholders. This philosophical shift culminated in the Business Roundtable’s statement of purpose in 2019, in which 181 CEOs committed to lead their companies for the benefit of employees, suppliers, customers, communities, and shareholders alike.
In the half-century between these two conceptual landmarks, CSR was born and grew up. A catch-all for sustainable, socially conscious business practices, it offers a recognised route for businesses to be more socially accountable. Corporate citizenship means operating in ways that do not negatively affect the wider community, employees, consumers, or the environment. Ideally, the business would have a positive impact on them. Volunteering, awareness days, and employee perks all fall under the CSR banner, as do recycling policies and dedicated efforts to reduce carbon emissions. The remit is broad and entirely self-regulated, and likely receives a nod in the annual report.
Without CSR, there would be no ESG, but the two are far from interchangeable. While CSR aims to make a business accountable, ESG criteria make its efforts measurable. With CSR activities varying massively between businesses and sectors, there is a lack of comparable metrics available. ESG activity, on the other hand, is generally quantifiable to a far greater degree.
The rise of impact investing has led to the demand for ways to rank companies on their ESG performance. ESG scores and ratings have been developed, and targets are set and reported on. Numbers can be applied to how companies treat their staff, manage supply chains, respond to climate change, increase diversity and inclusion, and build community links.
For many businesses, CSR has never graduated beyond being an add-on to their main purpose and overall direction, a footnote in the annual report, an activity that is allocated half a day of effort and focus once per year. At worst, it has become a marketing tool, allowing an organisation to say what it is doing well without having to back up its claims or talk about areas where it may be failing. To the immense frustration of CSR professionals, it has failed to live up to its promise, largely because it has far more breadth than depth in its scope.
ESG policies, in contrast, are criteria led and require that they be embedded in the core of a business’s strategy, rather than side lined. The power of ESG lies in its integration into a business. And its momentum is being driven by asset managers, consumers, and employees demanding transparent, purpose-led business practices that align with their own priorities.
In 2019, the Global Reporting Initiative revealed that 93% of the world’s largest companies by revenue already report on their ESG performance. That these corporations believe it is important to publish their work in this area reflects how central ESG has become to the way they do business. With potential shareholders increasingly focused on ESG issues as a means of ensuring long-term financial performance, businesses need to be open about their ESG pedigree in order to win investment.
A 2018 report by Allianz showed that 79% of Americans supported the idea of investing in a company that cared about the issues they held dear; 74% said that ESG investments both made them feel good and made good financial sense; and 69% cited governance issues such as executive pay and transparency as significant in their decision to invest.
And it is not just investors for whom ESG factors are important. Consumers want to know that the businesses they buy from have positive ESG policies. Purchasing decisions are bound up in social issues, meaning companies have to focus not only on the quality and cost of their products and services, but also on establishing sustainable, socially responsible, environmentally aware business practices in order to win and retain customers. The Allianz report showed that a third of consumers’ did business with a company based on its stance on social issues.
As recognised by the Business Roundtable in its landmark statement, stakeholder capitalism, in which the needs of all stakeholder groups are considered and promoted, is changing the way that business is done. And the more deeply the ideas and philosophy of stakeholder capitalism take root, the greater will be the need for ESG criteria to be at the heart of all business decisions.
Forming a virtuous circle, pressure from stakeholders is driving the focus on ESG issues, action on which helps to fulfil their needs. And with the use of ESG intelligence solutions, businesses are able to fully understand their ESG position and respond accordingly. Ultimately, ESG activity is replacing CSR because it has a tangible, measurable, positive impact.
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