ESG and Purpose Conversations are now Intrinsically Linked

Idea in Brief

• Organisation’s Purpose is getting intrinsically linked to ESG goals
• Superficially addressing ESG makes organisations prone to crises in the long-term
• A holistic approach is required to deliver on ESG?+?Purpose and enhance reputation and trust

There is a general consensus that a company’s Purpose refers to what its stakeholders understand or perceive it to be. It is less about what the company says about itself and much more about what others (employees, customers, shareholders, media, etc.) understand it to be. Research and studies from various fields substantiate that a better communication and understanding about a company’s purpose helps it improve its stock performance, attract better talent and strengthen its ‘social license’ to operate in the marketplace. Lesser number of business leaders now state that profit (alone) is their main Purpose. Rather companies have started to focus on their broader ESG goals to define Purpose. Our work with clients indicates that areas that are becoming a focus include tackling matters such as product ingredients (F&B), serious issues like child labour and worker conditions, supply chain provenance, waste management, inclusivity and so on -??ESG goals and an organization’s Purpose are now intrinsically tied together and it may no longer be possible to pursue either in isolation.

Purpose and ESG are intrinsically linked

Ranjay Gulati, author of Deep Purpose states that a deep sense of Purpose, (which unarguably cannot be fully activated without outlining ESG goals), helps to sustain credibility and trust within the ecosystem partners and establish long-term stakeholder relationships and motivate employees. Several studies indicate that many more customers, make purchasing decisions based on a company’s position or stance on issues-at-large (climate, emissions, D&I, etc.) and of specific relevance (industry, geography, etc.)

Business leaders are also personally facing immense scrutiny of their actions especially about when and how they implement their ESG agenda.?Today, a plethora of issues are competing for stakeholder (public, media, consumer) attention, which is resulting into severe pressure on how leaders can prioritise issues or causes to champion. This inherent tussle between issues is also making it difficult to correctly understand trade-offs and be politically consistent at the same time. The right ESG mix, powered by an authentic external and internal communication program, is much more likely to translate into equity with stakeholders who are increasingly sensitive to a firm’s reputational situation. Positive reputation translates into 'goodwill' that firms leverage during unforeseen circumstances and in times of crises.

‘Greenwashing’ is recipe for Media Crisis

Firms find themselves vulnerable to negative backlash from stakeholders if their ESG 'efforts' are perceived to be instrumental or (only) profit-seeking i.e. greenwashing, which is a curse in the long-term with the potential to severely erode Trust. Namrata Rana, a sustainability consultant and author highlights in Strategy of Shift that "brand trust is one of the biggest considerations for consumers while making purchase decisions…but, unfortunately, the 'Purpose' narrative many a times gets conflated with tall and exaggerated claims of 'saving the world' and many marketers are unfortunately (driving) down a slippery slope." Ranjay Gulati calls this "purpose-as-disguise." In order to effectively manage and mitigate reputation related crisis, companies can no longer afford to be lopsided in adequately preparing a timely response. By focusing on environmental, social and governance issues and being up-front about their challenges, companies can earn goodwill with various stakeholders. Only this can make them more resilient in the face of any crisis, which is always lurking around the corner!

How should companies prepare to mitigate issues and maximize reputation

"The distance between external stakeholders and shareholder value is increasingly created and protected through a strategic integration of the external stakeholder facing functions. These include government affairs, stakeholder relations, sustainability, enterprise risk management, community relations and corporate communications. Through such integration, the place where business, politics and society intersect need not be a source of nasty surprises or unexpected expenses" states Witold J. Henisz in Corporate Diplomacy.?

While discussing ESG stakeholder activism?Henisz explains that companies should and need to be seen as taking positive, long-term ESG action voluntarily and devoid of any stakeholder, activist and compliance pressures. It is also important that the firm’s social action is seen as genuinely authentic and never reactionary and providing adequate disclosures. For this, companies have to be prepared almost always and in real-time in today's 'digital-first' world.??

In order to be prepared "...boards need to work to identify emergent crisis areas and create clear game-plans for how they might be addressed. This should include plans for which committee or which directors will take leadership in the crisis response, what information needs to be secured right away, and what outside counsel and consultants will be brought in to assist. Boards should constantly evaluate whistle-blowing policies to ensure that signals of crisis reach the board directly and early. Crisis management is a learned capability that boards perfect from practice and experiential learning. Boards can practice through experiential drills where they talk through crisis scenarios in emerging risk areas relevant to their business."

It is also sometimes observed in client conversations that a company’s ESG positioning is good in some areas but, lacking in others. It can be argued that most companies are overwhelmingly focussed on defining and communicating “E” while “S” & “G” are either routine or do not find equal importance in their overall mix. Since not only investment and ratings agencies but also stakeholders desire a holistic view of a company’s ESG situation, performance across all three (E, S, and G) domains is critical to enhance stakeholders’ perception about the company’s trustworthiness. This would be what Gulati calls as the true north-star for companies and “purpose as win-win”; he talks about developing strategies where "commercial logic aligns with social logic" (see here).

In summary, "the Age of Responsibility?is well upon us, and the companies that will 'Outlast'?their competition are the ones that will build resilience and prepare their businesses for success through a holistic ESG adoption on one hand and?authentic communications?on the other" opine Dr. Mukund Rajan and Dr.??Rajeev Kumar, ESG authors of Outlast.