ESG plays a huge role in building sustained outcomes that propel value and fuel growth, while nourishing our environment and societies.The pandemic acted as a wake-up call for organisations across the globe to prioritize a more sustainable approach to business than before.
In a more connected world of today, preparations for future uncertainties involve reimagining worldwide socio-economic dependence. Globalisation of profits must be supplemented by the globalization of environmental, social, and governance responsibilities of organizations. Not only will this ensure the sustainability of the inter-continental business operations, but help to proactively replicate ESG best practices across geographies where, even today, regulations may not require a pro-climate action stance.
Globalization: A force for radical change?
In the past, companies focused on globalization as a growth model. In the future, companies need to change their focus and lay emphasis on how they think about globalization. They need to use different metrics and create a new framework for developing winning strategies. For example, to stall the spread of the pandemic, the reaction of public and private institutions had been chiefly kneejerk. Sealing borders and putting protectionist measures into place were quick fixes, but they amplified the incidence of the ongoing geopolitical and trade discords around the globe because some of the most pressing contemporary challenges, posing imminent risks for communities, institutions, and the planet are too big to be addressed unilaterally. Factors like climate change, environmental pollution, biodiversity degradation, and the erosion of fundamental human rights across supply chains have cross-border implications and can only be addressed through concerted political and economic efforts at a global level.
Maybe not by itself…
However, unfretted globalization might reap economic dividends for businesses, but it cannot create value by itself. A purely capitalistic view of globalisation no longer fits the taste of the businesses and investors. For instance, inadequate resilience to extreme weather events is already dealing billions of dollars in damages annually to the developing world’s agricultural outputs, affecting the global food supply chains. Similarly, poor working conditions of sweatshop laborers involved in manufacturing across the Global South can implicate their First World consumers. Both businesses and leaders need to take a broader view and create synergies where it currently matters the most.
But definitely with ESG adherence
The knowledge is not lost on the worldwide investor community that is increasingly seeking greater socio-environmental accountability of their funds. This is more as a hedge against obvious business risks than an altruistic gesture. It is not about climate change, diversity and disclosures alone. It’s about embedding these principles and more across the business, from investment to sustainable innovation. Interestingly, while 2020 marked an epoch in ESG focused investments, reaching a record high of $220 billion, Skadden predicts that the figure is set to be doubled by the end of 2021. Further S&P Global Market Intelligence data reveals that ESG-focused funds are consistently outperforming the S&P 500 in 2021.
Clearly, a change is over the horizon. In today’s boardrooms and C-suites, there is an enthusiasm and positive outlook towards ESG. Market forces are gravitating fast towards more responsible institutional conduct. Today, the ‘how’ is as significant as the ‘what’ of business outcomes. Undeniably, the idea of ESG-compliance has unleashed influential megatrends capable of redefining globalization in the New Normal which include:
Comprehensive reporting
The demand for ESG compliant business operations is bringing a sea change in the reporting practices of companies. In June 2021, the US House of Representatives passed the ESG Disclosure Simplification Act 2021, requiring publicly traded businesses to ensure that environmental, social, and non-discriminatory governance practices are seamlessly enforced across their operations, activities, and supply chain functions worldwide. India’s Business Responsibility and Sustainability Reporting is another such example. Each of these mechanisms are a departure from the past when companies voluntarily did most of the ESG disclosures, creating information blind spots for regulators and investors. However, the shift in trends towards business transparency and regulation has led organisations towards embracing more-established reporting frameworks like Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), Task Force for Climate-related Financial Disclosure (TCFD), World Economic Forum Compact for Responsive and Responsible Leadership (WEF-CRRL) and Science Based Targets Initiative (SBTi). They provide organisations with a consistent and recognized disclosure mechanism, allowing their investors to critically appraise financial and non-financial risks. Moreover, with ongoing global efforts to develop harmonized ESG reporting standards, companies operating worldwide will soon be able to uniformly publish ESG data, facilitating their fair comparison across countries and industries.
Social license to operate
Good governance is critical to the financial performance of the company. However, most notably for multinational businesses operating across jurisdictions and diverse communities, a solid and transparent ESG disclosure framework helps generate a trusted reputation, achieving greater strategic and operating freedom. Deregulation and reduced changes of adverse executive action come as natural perks. The host government and society, underpinned by the company’s ESG performance, start to rightly view it as a stakeholder contributing to national growth.
To be a socially responsible company, proactive and resolute adherence to internationally proclaimed human rights, gender equality, fair labor practices, and a zero-tolerance policy against corruption can help. The Ten Principles of the United Nations Global Compact serve as good guides for such an MNC. A corporate governance culture that is inclusive, responsible, transparent, and accountable is unquestionably set to maintain a balanced relationship with the community and the regulators, maximizing shareholder equity and brand value in the process.
ESG the next wave of globalisation?
For a long time, the jury has been out on the true nature of globalization. However, the post-pandemic world presents before us a unique opportunity to turn the page on previous realities. Businesses must adapt to this new globalized era by using ESG practices as a board to ride the waves of globalization. By creating value for all stakeholders – including promoters, people, and planet – businesses can successfully prevent decoupling economic growth from sustainable development.
(The author Akanksha Sharma, Global Head ESG —Sustainability, Social Impact, Governance & Policy, STL and the views expressed in this article are his own)
