Muharem Rusiti
November 2023
As the global community is increasingly asking for a more thorough addressal of social and environmental concerns, business practices are recognizing the need to move toward a more responsible and sustainable way of conducting affairs. This is giving rise to what could be called as ESG-oriented (Environmental, Social, and Governance) business management.
In this article, we will explore what ESG-compliant business management entails, the main contributing factors to its surge and growing importance in recent years, the opportunities and challenges it brings, and some other key aspects worth considering in this new and evolving landscape.
Definition
ESG-observant business management refers to a way of conducting affairs in a more accountable, responsible, socially and environmentally friendly manner. This means ensuring compliance with a series of standards and codes of conduct in these fields. In other words, it means prioritizing not only the mere financial returns but also the broader impact of business activities on society and the planet. Concurrently, it also serves as a framework and innovative tool for stakeholders, and particularly for regulatory bodies, financiers, and customers, to screen and evaluate an organization’s behavior, compliance, and potential investment attractiveness based on its performance in these categories.
More specifically, environmental factors outline what a corporation does to safeguard the environment, and may include its climate policies, carbon footprint, use of energy, waste management, level of sustainability throughout its supply chain, and, generally speaking, its overall efforts to comply with environmental standards and regulations.
Social criteria consider the social impact of a company and how it manages the relations with its employees, suppliers, customers, and the communities where it operates. It includes for instance if it promotes fair, safe, and inclusive labor practices, if it takes into account the concerns and well-being of the different local populations where it conducts its affairs, and among others, if it advocates for social good, including beyond its limited sphere of business.
Governance standards deal with the level of integrity and accountability of an organization’s leadership, the fairness and merit of the executives’ remuneration, the candor of the audits and accounting methods that it utilizes, the types of internal controls present, and the overall shareholder rights.
The Rise
Several factors have contributed to the growing prominence of ESG-friendly business management comportments, but perhaps the main driving force behind its rise is the increased public concern and awareness towards ethical, social, and environmental issues along with the newly perceived risks associated with what could be defined as conventional practices.
Other aspects have caused not only evolving societal expectations but also changed investor and customer preferences. This has generated increased public, media, and regulatory scrutiny towards the old-fashioned way of conducting affairs. On one side this has pressed governments and supervisory bodies worldwide to implement a series of policies and guidelines that incentivize and mandate more responsible and sustainable behaviors. It has also pushed corporations to proactively adopt more accountable business practices.
Opportunities and Challenges
One of the main positive aspects of an ESG-attentive business management style and corporate strategy is that it focuses on adopting an inclusive, all-encompassing, and stakeholder-centric method that tries to make a 360-degree impact. This style allows businesses to adopt a more responsible, sustainable, and long-term approach, rather than just a short-sighted and immediate profits-centric one.
Furthermore, this novel way of conducting affairs allows companies and investors to greatly mitigate or even avoid altogether the perils and negative consequences generated by risky or irresponsible behaviors. Remember the Volkswagen emissions scandal known also as Dieselgate or Emissionsgate, which triggered a global backlash and serious legal and financial penalties against the German car manufacturer’s dodgy conduct?
Additionally, due to increased regulatory scrutiny and greater investors’ demand, ESG-responsive organizations are progressively attracting greater flows of both domestic and foreign capital, creating thus a virtuous cycle of more viable and responsible practices and driving the transition to a more innovative, equitable, sustainable, and environmentally conscious economy.
While the growth of ESG business management is promising, challenges still remain. One major hurdle is the lack of comprehensive and universally standardized ESG metrics and assessment and comparison frameworks. This makes it obviously difficult for the public, and particularly investors, to objectively and accurately evaluate and compare the ESG performance of different companies.
Another challenging matter is the widespread and persistent general perception, and the resulting executives’ and investors’ caution or even distrust and some policymakers’ issue of concern, that a systematic integration and observance of ESG factors into business practices may result in corporations underperforming financially. This occurs even though the majority of experts agree that ESG-inclined business management behaviors help not only better administer companies and mitigate risks but also enhance financial returns, especially in the long run.
The Way Forward
In an interconnected, hyper-mediatized, and rapidly changing world, corporate and business management comportments are progressively drawing the attention of civil society, investors, and policymakers alike and are, willingly or not, prompted to shift to more ESG-conforming ways of conducting affairs. This novel methodology of doing business and evaluating organizations is surely here to stay and will be the cornerstone of a future where economic and financial activities are intertwined with environmental, social, and governance dynamics.
By considering amenability and compliance to ESG factors more attentively, implementing the necessary policies and guidelines that promote these practices, corporations can greatly contribute not only to create a more accountable, equitable, and sustainable ecosystem but also increase corporate value and generate attractive returns. This is important especially in the long run, that benefit virtually everyone, paving the path to position themselves as global leaders in this new and evolving business paradigm.
The motivations are, in fact, not only legal, ethical, or ecological, but also operational, economic, and financial. Although ESG adherence may be seen at first as costly and time-consuming to undertake, it can be very rewarding into the future for those that diligently carry it through. Companies that can effectively navigate people and planet, and focus not just on immediate profits, are known not only to gain the sympathy, respect, and support of civil society and different communities, but are also acknowledged to more easily magnetize investors and customers, and gain the backing of policymakers and governments. In turn, they significantly mitigate different risks and legal issues, and effortlessly attract top talent, especially among Millennial and Gen Z demographics. This is mostly because corporate reputation matters, and notoriously, organizations that are seen as more attentive and sensitive toward social, ethical, and environmental issues – particularly in the time of digital media activism – are known to gain loyalty, trust, and endorsements, and hence also greater investments, earnings, and financial returns.
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