Great ResignationClimate ChangeLeadershipInflationUkraine Invasion

Putting ESG in action starts with the G

April 20, 2022, 9:45 AM UTC
Artist Luke Jerram's 'Floating Earth' at Pennington Flash in 2021 in Wigan, England. Cultural and regulatory shifts are pushing business leaders to embrace stakeholder capitalism.
Christopher Furlong - Getty Images

The business community’s response to the Russian invasion of Ukraine is a dramatic example of stakeholder capitalism in action.

Their decisive withdrawal from Russia isn’t just a response to price signals or market pressures. It’s the institutional expression of moral outrage. It’s also a recognition that every company is a community of people–and that to thrive the company must reflect in its actions the values of the people who create and sustain it.

The SEC’s recent proposals on disclosure regarding cybersecurity and environmental risks are also powerful indicators that the push for business to integrate stakeholder values on environmental, social, and governance (ESG) issues into every level of corporate strategy has passed the tipping point. Nearly a decade of pressures from investors, activist shareholders, and proxy fights makes clear that action on ESG is an investor demand.

Inside companies, talent retention and recruitment are the number one issue on the minds of executives. The most in-demand employees want their values to be aligned with the mission of the companies they work for. Those same people enact their values when they make purchase decisions. ESG is an integral part of every step in the value chain: cost of capital, talent, and customers.

“Company as community” is a useful framework for thinking about the risks and opportunities stakeholder capitalism presents.  It reflects the experience of most people in their jobs, both good and bad. Mercantile, authoritarian communities don’t build trust. They fracture and fail under stress. In contrast, high-trust communities are resilient and creative in the face of change.

Trust is built in a community when there is a process to assess people’s goals, set matching priorities, take action, monitor progress, and admit and fix problems when they occur. Trust depends on transparent and accurate information being available to every member of the community. Trust, in other words, depends on governance.

The E and S are goals. The G is how you get there

Many companies are already taking a number of steps to integrate ESG into their corporate culture. But very few companies are putting all the steps together in the systematic and transparent way required to build a high-trust community. 

  • Set goals through a strategic values matrix.
  • Create an oversight system to allocate resources, monitor progress, and fix problems. 
  • Benchmark against peers. 
  • Provide accurate reporting to stakeholders.
  • Obtain third-party assurance

Ideally, the organization’s strategic values matrix is built both from the top down and from the bottom up. A top-down approach starts with an initial triage that surveys the business ecosystem for ESG issues that can potentially affect the company. The list is then assessed to see how and where those ESG issues intersect with the company’s operations. 

The bottom-up process uses the top-down assessment to engage stakeholders, define core values, and set concrete and actionable goals. The strategic values matrix comes together through the hard work of integrating those values and goals with the company’s strategy to innovate, offer products that improve people’s lives, create quality jobs, and provide a fair return on investor capital. 

The remaining steps, such as oversight, allocating resources, monitoring progress, reporting, and revising goals in response to experience–are familiar to every company. However, we need to bring the same degree of rigor we apply to financial reporting to the ESG aspects of these processes. This won’t be easy unless boards have a robust process to set priorities and allocate the resources necessary to integrate ESG into strategy and oversight.

That is the clear message of the proposed SEC rules on cybersecurity and climate risks. In their detailed requirements for disclosure of corporate governance processes, the new SEC rules effectively demand that every reporting company go through such a process.

The SEC proposals only cover two aspects of ESG, albeit very significant ones. Given the heavy interest from investors in other ESG issues–human rights in the supply chain, diversity in the workforce and the boardroom, income inequality–more such proposals may be coming.

Stakeholder trust is a core component of resilience and of long-term economic value. Identifying the ESG issues that matter to stakeholders is a necessary element of building and maintaining trust. Being good on ESG issues is a necessity–but being great on ESG issues is an opportunity.

Jamie Gamble is a managing director at PricewaterhouseCoopers

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