It’s often said that things that come in ‘threes’ are funnier, more satisfying, more effective, and/or more memorable, than other numbers of things. How might that help us make better ESG decisions then?
The vast majority of decisions we make, be it in business or everyday life, are short term. These decisions generally happen instinctively and almost passively. However, approaching longer term and more complex decisions in this way is cumbersome. Take the example of the decision made by French colonial rulers in Hanoi, Vietnam to eradicate rats from the city. They decided to introduce a program paying people a bounty for each rat tail handed in. Intuitively, this may seem like an effective solution, right? Well, unfortunately it had the opposite effect. Locals began farming rats for their tails, exacerbating the problem. This shows how we can’t always rely on intuition for complex decisions – short term thinking can jeopardise long term results. This is a significant challenge for sustainability and ESG driven decisions, which intrinsically work on long timescales. Thus, embracing sustainability in business decisions requires a long term approach which draws upon a different set of value drivers.
There isn’t yet a universal framework for making ESG driven decisions, however as a starting point, I think there are three very basic questions that anyone charged with influencing or making ESG decisions should always be prepared to ask…
1. Is ESG being incorporated into this business decision for risk, compliance or performance reasons?
Before making a ESG decision, it is important to be clear on the purpose, vision and desired outcome of incorporating ESG in decision making. What are you trying to achieve with incorporating ESG with this decision? What ESG factors are most relevant to this decision? This isn’t always simple as ESG decisions tend to operate over long periods of time. Decision makers have to bring future risks and opportunities into immediate focus. This requires a level of understanding of the specific and likely future ESG risks to different markets and an assessment which ESG risks and opportunities could become material. These can be related to climate risks, consumer trends, technological trends, resource availability and so on. Take the automotive sector as an example. ESG analysts working in this sector will assess how well different companies are reacting to trends towards electrification and factor this into their forecasts and decisions. When making an ESG decision an understanding of which stakeholders will be relevant over different timescales is also important. Balancing strategic ESG goals in decisions is individualised and different entities will prioritise and target their ESG aims accordingly.
2. Can this ESG decision be treated in isolation?
ESG factors should be embedded throughout the business strategy and not merely as an add on as I eluded to in my previous blog. If the ESG decision can be treated in isolation, it runs the risk of undermining the decision and instead act as a ‘bolt on’. Effective ESG decisions must be aligned with core business strategy. This is reflected by increasing ESG scrutiny by investors across assets that are well managed in both financial and non-financial terms. A recent report on investor perspectives of responsible investment by the World Business Council for Sustainable Development (WBCSD) recommended that “Companies should show how they are integrating non financial information into their overall organisational strategic decision making” and distinguish the metrics that are solely applied for compliance. If ESG decisions made by business can align to this approach, it will result in a mutual benefit for both businesses and investors and lead to more meaningful, value oriented outcomes.
3. Does the decision add value to the business?
Fundamentally, ESG should be incorporated into decision making to add value to business and investments. While this value is often monetary it doesn’t always have to be. Reputational value and social value can induce a range of positive impacts. For example, in 2015, when VDM metal firm was acquired by parent company Lindsey Goldberg, there was a drive to transform and improve its ESG involved focusing on improving health and safety for workers. Health and safety became a key element of the development programme for employees and an integral part of their overall strategy. Within two years, the lost time injury frequency had reduced by 51%. This example demonstrates how smart ESG decisions can significantly add value to companies. Ensuring value from decisions is essential- if not then the decision runs a real risk of being nothing more than corporate social responsibility ‘hot air’.
As we’re quickly learning, ESG decisions are complex and should be approached with a certain degree of reverence. ESG is a relatively young space that requires a level of flexibility and courage to navigate. I’m left thinking that if we really want to make good ESG decisions, we should start using a rule of three that forces us to consider a new triangulated base of purpose, integration and value.