Responsible Business - what is really required to meet the bar?
Maya de Souza
Global Sustainability Leader |Collaborating with industries & agriculture for circular economy |Decarbonization|Green supply chain |Textile circularity |Policy Advocacy| Oxford University alumna|EU, UK, Hong Kong & India
My year and a half at @Business in the Community was hugely important in giving me further insight into the “responsible business” movement. ?With the latest figures[1], showing June 2023 as the hottest June in the UK since records began in 1884, and July, saw heatwaves across many parts of Europe, China, and the USA, I am suffering from some angst as to whether ESG, responsible business, call it what you like is taking us where we need to get to. In terms of progress in cutting emissions, overall across the globe these have gone up, and the small reduction in the UK over the past year relates to a warmer winter and reduced energy needs.
In government, it is generally assumed that businesses will maximise profits and policy measures need to either create constraints in which they operate, use taxes/trading mechanisms to create the right incentives, or ensure transparency so consumers and investors drive change.?
However, working with businesses, I know how many are seeking independently to embed sustainability within their organisation. There are committed and inspiring leaders.?Around 80% of companies have ESG commitments in place, 85% of asset managers say ESG is a high priority[2], ?SBTI reports that over 4000 companies are working on climate commitments. But are they on the right track? Do we need to go further and introduce new duties on companies? This is what’s advocated by some like the Better Business Act campaign.
The first question in my mind is whether large businesses are making headway in terms of climate/environment, equity/non-discrimination as core elements of responsible business? ?Around 80% of BITC’s company members have Net Zero targets.? BITCs RB Tracker dashboard[3] shows that around 50% are taking action on equality and diversity and inclusive employment as well as health & well-being. There is indeed a recognition in the business community that they need a license to operate and can’t just focus on short term profit.?
“In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long- term value for its shareholders.” Larry Fink, CEO, BlackRock.
Even with the pushback we have seen recently, the Friedman Doctrine that says businesses should focus on profit alone, now seems a dated concept.
However, rigorous plans to make real progress are less than obvious.?Accenture says 93% will fail to meet their goals. Long term commitments allow action to be pushed back to the next CEO, next Board. Interim targets and milestones are key, but these are less commonly in place. Switching business models and products, large scale use of renewable energy is vital but these are hard to find at a significant scale.
The second question is whether this slow progress is because businesses have their hands tied – are they currently obliged to maximise shareholder profits?? A little digging shows there is no duty to do so under the Companies Act s.172 in the UK[4], at least in relation to immediate profits. The general view is that company directors have considerable discretion to make decisions taking into account longer term interests. Considering the huge impact of climate and social unrest on the longer term interests, there seems to be a huge amount of space to do the right thing.
Though its clear that things are not all rolling along smoothly, there have been some developments that may take away the need for legislation. I have looked at here the emerging doctrine of Purpose, the SDG framework, and “ESG” backed by the Taskforce on Climate-related Financial Disclosures.
BITC defines business purpose as “articulating why the business exists, beyond making a financial return, and how that benefits wider society.” A purpose-led business is one which states the positive difference it aims to make in the world, and ensures this is embedded in the organisation’s strategy and planning. BITC has done a great job in providing a toolkit for action and injecting some clarity into what this means[5].
The key word is “articulation”.? The purpose doctrine though important is more about communicating purpose, and getting people to rally around it, than actual outcomes. It also enables businesses to pick and choose – they may decide they are going to focus on enabling people to fly to other countries quickly and cheaply, increasing their exposure to other cultures. This may cut into carbon budgets harming our long-term future. Having a “no harm” principle or “significant progress” requirement in other areas to complement this is critical.
The SDG framework partly helps address this problem as it limits what would be an acceptable purpose. However it is a broad collection of good things and if a company were to focus on just one or two, they could be doing something good combined with a lot of harm. I expect there are few companies that wouldn’t argue they are helping end poverty through creating jobs, getting women into employment, growing the global economy etc. But at the same time they could be harming our delicate atmosphere and degrading our natural environment.
?Is ESG as a whole any better? As a concept, it brings in the pillars of the environment and direct social value, as well as governance. However, a recent report by Science Beta[6] shows that companies that have high ESG scores are not doing any better on carbon emissions than others.? This is the “green dilution” problem caused by throwing too much into one basket. ?A focus on transparency rather than hard outcomes is also a problem with the ESG rating system, that arose at our Circular Economy Leadership Roundtables (see report attached).? Separating out indicators and reporting separately on climate and other impacts is critical.[7]?
?The Taskforce on Climate-related Financial Disclosures approach may also help – this encourages companies to look at climate through the lens of corporate risk – preparing for changing investor, consumer behaviour and the policy framework. This will shortly be supplemented by the Taskforce on Nature-related Financial Disclosures. It is of course important for businesses to assume the right policy changes will be introduced and back that change. If not, some businesses may decide to game things shifting the policy framework dangerously off track.
The overall trends in actual carbon reduction and indicators like the gender and ethnicity pay gap suggest that there is a lot more to be done - these existing voluntary frameworks aren’t driving the change at least not at the speed that’s needed. Some of the ratings may in fact be misleading to consumers and investors. A legal duty as well as a more sophisticated approach to responsible business needs to be on the cards.?
My take-aways are mixed - RB done well is fundamentally important:
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a)???? Businesses should assess their actions against all the SDGs and ensure they are scoring positively on each of them – just a few is not enough;
b)??? They should report separately on key indicators including carbon emissions and pollution, or preferably, all the SDGs. A stable climate and natural resources are so fundamental to everything else so this is a good starting point.
c)???? Businesses should work together to ensure a policy framework that enables change and gives them the certainty required for investment.
d)??? They need to work together to achieve systems change - acting independently is likely to be doomed from the outset
But government needs to begin developing a legal framework for responsible business putting in place new duties. A good starting point would be in relation to assessing and reporting against the SDGs, but a clearer duty would help galvanise change and take away the excuses that internal stakeholders may present.
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Notes:
Business in the Community was set up originally to enable business collaboration and collective action on social inequity. ?It’s original motto was “No healthy high streets, without healthy back streets”. The impetus for its birth was social unrest - the Brixton Riots of 1981 with its roots in structures which left a set of people disillusioned and disenfranchised.? With the climate crisis as well as continuing inequality and discrimination to address, the mission is now: fairer, greener, together.
Leadership excellence | Digitalisation | Innovation | Climate change | Healthcare
1 年This brings to mind “conscience capitalism” which came out of the 2008 economic crisis. This is the belief that concern for social and environmental good (conscience) should be linked to market capitalism to drive change in our society.
Global Circular Strategy Leader @ Ingka Group, IKEA | Sustainability Strategy, ESG Talks about #sustainability #circulareconomy #circularbusiness #justtransition #systemchange #wellbeingeconomy #consumption
1 年I ?? agree that we need legislative change, otherwise we will not move fast enough and there is no level playing field. All businesses should set science based targets for both GHG emissions that are Paris aligned and also SBT's for nature once this methodology is launched. This is currently not a legal standard and CSRD and mandatory reporting will not necessarily accelerate action, even if transparency will start to create some degree of comparability. How will resource access be governed when supply truly bites? Should luxury brands have the same access to precious resources compared to food say, or other needs based products and services. Shifting a trajectory towards a new way to aim towards and measure wellbeing of people and planet will be needed, and if left to voluntary action we will face a bleak future..