Practice makes purpose: The four biggest ESG mistakes to avoid

Sound environmental, social and governance (ESG) policies define how our companies interact with society and what kind of corporate citizens we are. ESG principles are integral parts of how we conduct business, what our social and environmental impact is and, underlying it all, whether we are accountable and transparent about it.

But why exactly is an ESG policy so important, and what are some of the common mistakes companies make in this area?

Why is an ESG policy so important?

Over the last few years it has become abundantly clear that we all have to act responsibly when it comes to the environment; whether it is global warming, pollution or industries’ effects on biodiversity, we can no longer opt out. Investors are increasingly scrutinising companies for their environmental impact, so being good corporate citizens is also good for business.

Social responsibility refers to how a company interacts with its own people, and what kind of impact it has on communities. Companies have been focusing on their ‘cultural hygiene’ such as diversity and equality when it comes to hiring or promoting employees. However, increasingly, how companies interact with the wider community is becoming a focal point for society and determining investment appetite.

Governance overrides all this and determines how accountable a company is in delivering on its business, its environmental and social responsibilities. It’s no longer enough for profitability to be the key metric. It’s now essential we’re aware of — and accountable for — our business’ environmental footprint, what governing principles we operate by, and what our social impact is.

Profitability, environmental, social, and governance responsibilities go hand in hand. ESG principles are fundamental to long term success and should become an integrated part of the operational structure of any corporation.

Common ESG mistakes

1. Treating ESG as a footnote

   A well considered and integrated ESG policy is good business. Investors increasingly make decisions on how well behaved a company is as far as its social and environmental impact is concerned, and how transparent and responsible it is when conducting its business. We have to look no further than Rio Tinto’s disastrous blasting of the 46,000 year old Indigenous site in the Juukan Gorge or the shameful conduct by Facebook during the 2016 US elections culminating in federal investigations and major share price erosion in 2018.

   Being good corporate citizens needs to be part of your company’s DNA.

2. Making it generic

   Companies need to go beyond general policies and really address what is important specifically to them when it comes to their social and environmental responsibilities: what business are they in; what do they stand for; what is their workforce like, and how can they ethically deliver the best outcome for their stakeholders?

   An ESG policy that investors respond to should show careful consideration of the specific positive impact a company may be able to exert by applying it.

3. Separating the E, S and G

   The three aspects of an ESG policy are closely linked. A company cannot be expected to be rewarded for promoting diversity in the workplaces while systematically polluting the environment. The negative impact of pollution on health and the community will have to be transparent for the policy to work. Likewise, good governance is not enough; there are only so many sexual harassment matters that can be reported to boards before equality and respect in the work place is questioned.

   The three components of an ESG policy work hand in hand and should carry equal weight.

4. Failing to seek employee buy-in

   It is all well to have a shiny ESG policy in the annual report or at the end of every corporate presentation. It may impress investors initially but it becomes meaningless unless employees are involved in the development and delivery. Ultimately it comes down to the weakest link; often someone who is not aware, hasn’t been properly trained or has no buy-in as far as the policies are concerned. Make the ESG policy part of the induction process into any job, seek input on ways it can be observed and delivered in all layers of the company’s operations.

Making sure you get ESG right in your company

Clearly, having a relevant and well-defined ESG policy really is good business. It is worthwhile to get it right by developing, understanding, redefining, or in some cases completely overhauling aspects of the company’s operational principles. But principles alone are not sufficient.

Successful ESG doesn’t take place at board-level, in a silo of policy-making or PR spin. Decision making around ESG and its implementation should involve internal stakeholders at all levels. Deciding how you go about getting everyone on board — and for the development of policies to be authentic — needs to be clearly structured and inclusive.

ESG should underpin the company’s everyday activities, actions taken, and the disclosures that are made.

Some big players are proving that effective ESG practices can have extraordinary impact. Fortescue Metals, for example, has made a very strong and deliberate transition into renewable energy over time to become “a supplier of green energy and hydrogen that would rival the country’s biggest oil suppliers in terms of energy produced”.

Investors are also becoming increasingly deliberate. Australian Super manages $280 billion in funds and has a very clear policy that it will only invest in companies with sound ESG principles. Verve Super is another terrific local example. An impact-led super fund co-founded by women, Verve “struggled to find interest in their purpose as a mission-led business”, but eventually landed $2.6 million in funding from a core group of like-minded investors.

It is clear that as business leaders, we cannot opt out of having a cogent, relevant, and implementable ESG policy. It is not only good business but essential to becoming good corporate citizens in the long run. Ask yourself, what do we as a company really stand for? What are the core values and responsibilities of the business that are not negotiable for us?

Good governance, whether it relates to how we treat our people, communities or the environment, will flow from there.