Over the past few years, one acronym has been at the forefront of executive discourse: ESG, or sustainability, if you want to get simpler. ESG basically means Environment, Social, and Governance. These are three (3) factors that can ensure an organisation’s long-term success. Due to global events and the very nature of business, ESG is more commonly viewed through an environment and governance lens. The social aspect has been underutilised and understudied, especially in industries where legal and compliance issues are not as stringent. Even in the cases where it is given focus, organisations tend to treat it in terms of token diversity and inclusion strategies and initiatives. This usually leads to problems with monitoring and even reporting because the “S” is so much more than that.
Problems with the “S” are further compounded in African regions. We typically play fast and loose with our regulations and compliance, so even our environmental and governance efforts have just begun to see forward momentum. The social efforts made by organisations have not fared any better.
What is the S in ESG?
According to S&P Global (one of the leading ESG rating agencies), it means the relations between a company and people or institutions ‘inside’ and ‘outside’ of it. In a blog post titled “What is the ‘S’ in ESG?,” S&P outlines three types of “S” issues:
- How can a company’s workforce requirements and composition present problems for the organisation in the future? Labour strikes or consumer protests can directly affect a company’s profitability by creating a scarcity of skilled employees or controversy that is damaging to a corporation’s reputation.
- What risks come with the safety implications of a product or the politics of a company’s supply chain? Corporations that ensure their products and services do not pose safety risks, and/or minimise the exposure to geopolitical conflicts in their supply chains, tend to face less volatility in their businesses.
- What future demographic or consumer changes could shrink the market for a company’s products or services? Complex social dynamics, from surges in online public opinion to physical strikes and company boycotts by different groups, affect long-term shifts in consumer preferences. Decision-makers can consider these as essential indicators of the company’s potential.
- From these issues, you can determine the stakeholders that organisations need to have relations with: employees, management, consumers, vendors in the supply chain, government, community, action/activist groups, etc. As long as its relations can impact the performance of an organisation, it falls under the “S”.
The nonspecific definition of the “S” and its purview is the primary reason why organisations tend to avoid it in relation to its more executable and trackable ESG counterparts (Environment and Governance). ESG is typically viewed through a lens of materiality (how does this impact an organisation’s financial performance?) but that approach does not always work with the social element.
Due to its broad scope, reporting on the “S” is not an easy task to accomplish. Correlations can’t always be directly drawn from action to result. Here’s an example: If a car manufacturer decides to pivot a significant portion of its operations from greenhouse gases to more environmentally conscious alternatives, that manufacturer will likely see an uptick in its financials because it will be tapping into a new market, and sustainability investors will take positive action towards it. Now, let’s use a similar example for the “S”: A fast fashion company decides to move its production away from exploitative factories to more equitable locations. The financial benefit may not be readily available; in fact the company is more likely to take a hit in the adjustment, but over time, as public sentiment becomes more positive, the real value of that social action will show its results. Isn’t that what sustainability is all about, though? Long-term success and resiliency?
As much as social reporting is not easy to undertake, it’s fairly easy to notice positive results from social strategies and actions. Walmart became a viable option for socially conscious investors after it announced that it would restrict the types of firearm ammunition that it sells. It was also reported that people were more likely to shop at Walmart, on average, after the change was announced. Beyond the public sentiment gained from the decision, it also serves as risk management for the organisation. The organisation is less likely to be caught in a mass shooting scandal for selling ammunition to perpetrators.
Another aspect that is important to point out about the “S” in ESG, is that every sustainability action or strategy is entwined with it. If you look at organisations that announce some new environmentally friendly initiative, the initial response is not from the initiative or its performance. Chances are that the initiative is not fully launched yet. The early response is from the public sentiment towards the announcement. This is why greenwashing and virtual signalling are so prevalent. Organisations can get a positive buzz from a statement instead of doing the work towards a sustainable initiative. This is also true in terms of crisis: in Nigeria, we are currently undergoing a currency crisis due to several factors. The public’s sentiment towards the banking industry is currently in shambles, and regardless of when or how the governance issues are resolved, that negative sentiment is unlikely to change for a long time to come.
The need for organisations to improve their social relations is more necessary than ever before. Stakeholders have begun to hold organisations to higher standards and they have to meet those standards to remain resilient. In this age of information overload, any stakeholder can easily access information about any organisation but somehow, this privilege does not work the other way around. So many organisations are unable to properly understand or connect with their stakeholders and that is the basis of any stakeholder interaction.
In the African regions, this is perfectly personified by traditional companies and their failing efforts to engage Gen Z as both consumers and employers. Their social efforts are typically deemed tone-deaf and woefully unstrategic. To fix this, companies need to constantly be in tune with the complex and rapidly changing needs of their different stakeholders. This is not just for current social strategies, but for the future as well. You must remember: There will be another generation after Gen Z.
For organisations to truly engage their stakeholders, they must do something that seems to be the antithesis of the corporate world: they must be genuine and authentic. The fact is that social interactions can not be duplicated. No two organisations (even in the same industry) can have identical relations with their stakeholders. Every organisation must create unique relationships with their different stakeholders. Consider the current relief efforts for the harrowing Turkish-Syrian earthquake. The world has come together to help the region recover from the disaster, but no two countries embody an authentic and inauthentic approach other than Qatar and the US. On one hand, the US has thrown money at the problem by pledging $85m towards relief (a fraction of the $24.5bn military pledge made to Ukraine). On the other hand, Qatar has donated 10,000 mobile housing units (used during the just concluded world cup) to the earthquake zone. Timing may also play a factor, but it’s not hard to see which of the two (2) relief efforts would have a lasting impact.
In Nigeria, few organisations are also engaging in authentic social interactions. One such example is Templars, a leading law firm in the country, which is currently in partnership with WARIF (Women at Risk International Foundation) where they provide legal aid for the foundation and its delicate legal issues. This is in conjunction with the regular advocacy initiatives that they execute together.
As much as businesses try to design strategies and operations that account for environmental preservation, efficiency, and ethical practices, we all need to understand one thing: every organisation succeeds or fails based on the results of its stakeholders’ actions. With this in mind, the “S” in ESG could very well be the most important and connective aspect of the entire concept. An organisation that is in tune with the social dynamics of its stakeholders will always know the right moves to take to achieve sustainability.
About The Society for Corporate Governance Nigeria
SCGN is a registered not-for-profit organisation committed to the development of corporate governance best practices in Nigeria. Today, the Society is the foremost institution committed to the development and promotion of corporate governance best practices in Nigeria.