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The changing face of Corporate Strategy with ESG inclusion

Authors: Priya Ravi Ranjan - Partner, Pozhat

Dr. Raghuram L Tata - Associate Professor XLRI

Sriaditya Kasula - Director, ValueLabs

In 2007, Nobel Prize winning economist George Akerlof gave his presidential address to the American Economic Association where he called for a new emphasis on sensible, pragmatic economics: “ You think about problems in the world, “ he advised, “and you ask: can government do something about that? At the same time, you maintain the skepticism that the government is often inefficient”

There is no dearth of global problems, poverty, hunger, income inequalities, human rights abuses, risks due to human induced climate change, and now, pandemics like Covid-19 that has brought the world to its knees. Clearly, the governments alone cannot bear the burden of abuses of the environment by corporations for centuries.

We already know quite a lot about the institutional role of businesses in society as creators of employment, creators of knowledge and innovation and providers of financial capital. Businesses therefore cannot be accepted as actors solely in the pursuit of economic self-interest but they also need to execute their institutional role towards the larger goals of the global society.

The underlying principle of corporate governance is to ensure that corporates must conduct business responsibly and corporate practices are not only directed towards economic interest of the organisation and the shareholders, but must encompass social, environmental and economic interests of all its stakeholders.

As time progressed, all these aspects required razor sharp focus, monitoring and reporting which lead to rise of functions like Corporate Responsibility, Corporate Sustainability, ESG (Environmental, Social, Governance), EHS (Environment, Health and safety) and CSR (Corporate Social Responsibility). In the recent past this was one of the facets of changing organizational strategies that we are or we have been experiencing.

The concept of Corporate Social Responsibility (CSR) came as a way to express the expectation that “good citizen companies” would avoid stakeholder harms and contribute to societal well-being in ways and means that are far beyond the regulatory norms. Sadly, Sustainability or CSR professionals today think that Social responsibility is all about doing specific programs using the CSR budget. In the long run, they get into the funding mode and don’t seem to measure the impact of the programs on the intended beneficiaries from the society and on their abilities to become self-sufficient in the minimum possible time.

CSR was meant to complement the governments’ efforts towards ameliorating the social problems without over-restrictive interference from the governments. However, in the absence of the appropriate enforcement mechanisms, CSR came to be associated largely with philanthropy and community relations.

We are now witnessing a transition of the tactical approach of social responsibility to a well evaluated mitigation strategy for the negative environmental or social impacts of the corporations and going beyond, taking up strategies that contribute to global issues of sustainable development.

This led to another important facet of changing organizational behavior or can we say strategy that gave wind to the concept of Sustainability which continues to emerge as a way for organizations to organize their inputs, outputs and outcomes, in a way that made it possible for all stakeholders to evaluate that their legitimate interests are being met, along with economic value creation by the organization. Sustainability also brought forth the idea of collaborative or integrated thinking and working so that corporations earn profits legally, ethically and responsibly while also contributing to the societal well being. It brought back the word ‘ethos’ from extinction and helped organizations redefine their Sustainability strategies.

The adoption of the seventeen Sustainable Development Goals (SDGs) and the unprecedented Paris Agreement to limit the global temperatures within 2C of the pre-industrial levels at the UNFCCC COP 21 is a reflection of how the various governments, investors, and corporations themselves have begun to acknowledge the relevance of environmental and social issues, not just for business sustainability but for the survival of species on the planet, including humans!!

Further, even a cursory glance at the way in which the strategies of corporations are shaping up over the past couple of decades, gives us ample indication that the stakeholder theory and ESG materiality has begun to finally find its way into the key performance parameters of organizations, which, even a decade earlier, were primarily focused on profit making and compliance to regulations.

As a result of this growing attention to Sustainability, particularly by the investors, many Sustainability reporting standards and frameworks like GRI, CDP, SASB and most recently the TCFD recommendations have emerged since the start of this century. ESG materiality is fundamental in all these frameworks, ensuring that the reporting organization favors the needs and expectations of all its stakeholders.

Even the MSMEs are contemplating on the concept of Sustainability & ESG, and many of them seem to have begun to understand the merits of stakeholder theory.

However, when we analyze the profiles of the stakeholders, investors still hold the number one position and most organizational strategies are devised to focus on investors and a few others, but a start has been made.

Cleary the debate on shareholders Vs Stakeholders is getting over. The moot question is how, and not if, the normative underpinnings of the stakeholder theory will help the business ethics field by providing insights useful in the process of business management!!

The current century has also seen an exponential rise in the number of organizations publishing sustainability reports. According to KPMG Survey of Corporate Responsibility Reporting 2017, 93% of the world’s largest 250 corporations and 60% of the companies in every industrial sector now report on their sustainability performance. The SDGs have been widely adopted by businesses worldwide in less than two years since their launch, says the report and will have a growing profile in Sustainability reporting in the coming years. A solid majority of these companies have identified critical issues like Human rights and carbon emissions as key issues in their report.

The same survey, however also confirms that a majority of companies seem to be in denial and do not acknowledge climate change as a financial risk in their annual reports. Of the minority that do acknowledge climate risk, very few attempt to quantify or model the business value at stake. Most of the Carbon emission targets do not relate to the targets set by the national governments, regional authorities or the UN. While it’s a start, for many, Sustainability reporting is still a check box activity and these companies say ‘we are doing it’ because of all the greater good reasons, but when one assesses their involvement, the underlying reason is that their competitors have jumped on the sustainability band wagon. For many it’s a great marketing strategy.

It is therefore evident, that there are varying levels of stakeholder engagements in organizations and hence incomplete information has been used to arrive at these targets and issues. The process of engagement with the key stakeholders, and perhaps the identification of the key stakeholders needs a thorough relook and revisit, if at all the organizations wish to make a palpable contribution to the global issues through the execution of strategies.

For e.g., the increasing global connections, the community or those affected by the organizations, include virtually everyone, everything, and everywhere. The criteria of materiality, immediacy and legitimacy need to evolve further to include the hidden layers of impacted stakeholders or those who can impact the organization, like the consumers on virtual platforms, nameless sea creatures, generations not yet born.

Hence a diligent use of the stakeholder theory and materiality by corporations may bring about the evolution of the theory itself, which is more compatible with organizations, in not only balancing the needs of all stakeholders, but helping all the risks and opportunities come to surface, that currently are obscure.


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