Shareholders worldwide are paying ever-greater attention to companies’ environmental- and social-governance principles (ESGs), leading a growing number of CEOs to begin weaving these tenets into their daily corporate operations. That’s due in part to internationally agreed-upon frameworks for compliance in sustainable production and human-rights considerations. What are these ESG standards, exactly, and is it worth it for a company to pursue them voluntarily?
Three Common ESG Frameworks
The United Nations Global Compact
The UN Global Compact is the world’s largest corporate-sustainability initiative. Launched by the UN in July 2000, the Compact is a policy arrangement—encompassing 10 principles in the areas of human rights, labor, the environment, and combating corruption—through which companies can develop individual sustainability strategies.
The UN Global Compact currently comprises some 9,500 companies of nearly every size and market sector, plus thousands of non-business entities such as associations, nongovernmental organizations, academic institutions, and cities. All UN Global Compact signatories pledge to adopt its principles as part of their culture and daily operations; they’re also required to issue an annual Communication on Progress (CoP) to keep their stakeholders updated. Although the format is flexible, the CoP must contain three elements: (1) a statement by the company’s chief executive expressing continued support for the UN Global Compact and renewing the company’s ongoing commitment to the initiative; (2) a description of actions the company has taken or plans to take to implement the Compact’s 10 principles; and (3) a measurement of outcomes (or other measurement of results).
Another program linked closely to the UN Global Compact is the Global Reporting Initiative (GRI)—an independent group, headquartered in Amsterdam, that has been a pioneer in sustainability reporting since 1997. GRI helps businesses and governments understand and effectively communicate the impact they’re making on climate change, human rights, governance, and social well-being. In May 2010, the UN Global Compact and GRI inked an agreement to align their corporate responsibility and transparency work: GRI vowed to develop guidance regarding the Compact’s 10 principles, while the UN Global Compact adopted GRI’s existing guidelines as its own recommended reporting framework. As a result, GRI is today the most popular method for reporting on corporate responsibility and ESG principles overall.
The Equator Principles
The EPs are another popular set of guidelines—a risk-management framework adopted by financial institutions to help them assess and manage various projects’ potential environmental and social peril. Applicable to just about any industry, the Equator Principles—so named because the founders of the EPs wanted their adoption to be a global effort—offer a minimum standard for protecting human rights and the environment via due diligence and careful monitoring of large-scale development projects at every stage (for instance, oil-and-gas developments, mines, power plants, and dams).
EPs were formally introduced in Washington, D.C., in 2003 by some of the world’s largest project-finance institutions; they’ve been periodically augmented over the ensuing decade and a half. Last November, in fact, the Equator Principles Association (the unincorporated association of member EP financial institutions who administer, manage, and develop the EPs) announced it was beginning an 18-month review of the current principles, focusing on four key areas: social impact and human rights; climate change; designated countries and applicability standards; and the principles’ scope and reach. Ninety-three Equator Principles Financial Institutions in 37 countries have adopted the principles.
This widely recognized standard, launched in 2010 by Switzerland’s lauded International Organization for Standardization after five years of negotiations with stakeholders around the world (including individuals from industry, government, consumer groups, and nongovernmental organizations), offers guidance on how businesses and organizations can operate in socially responsible ways. ISO 26000 emphasizes that such behavior both furthers a company’s social bona fides and improves its perception among consumers, its employees, and local communities alike.
Unlike some other ISO standards, ISO 26000 is intended solely for guidance, not formal certification. The standard identifies seven key principles of socially responsible behavior: accountability, transparency, ethical behavior and respect for stakeholder interests, the rule of law, international norms of behavior, and human rights. It also works to enhance the credibility of social-responsibility reports by promoting terminology to establish a common lingo across the various frameworks.
Application in Action
Businesses around the world that have implemented one of the frameworks above (or some combination of them) are already offering object lessons in the benefits of adopting ESG principles. Consider two worthy outcomes:
Legislative regulation was traditionally the blunt instrument for encouraging companies to focus on product safety and environmental stewardship. A gradual shift from this sort of command-and-control method to voluntary ESG initiatives has shown how protracted and complex legislative regulation is, and how jurisdictional inconsistency can confound even the most well-meaning companies with wide reach.
Direct regulation is of course the most blunt means of changing behavior, but ESG adopters recognize that market forces also create pressure for change. Responsiveness to these prevailing market forces means that ESG approaches are entirely compatible with a business’s interests even in the absence of formal regulation.
Consider, for example, Restricted Substances Lists and similar measures that have been adopted by manufacturers (retailers especially) to mandate exclusion of certain chemical ingredients from their supply chains. Widely available software that screens for a given substance was developed relatively quickly due to market pressure, making the use of RSLs easy to implement. Those throughout the supply chain were then motivated by competitive pressure to provide alternative ingredients, reinforcing the perceived effectiveness of the ESG approach—and the companies’ newfound reputation as drivers of change.
A Company’s Perception.
Beyond their effect on the supply chain, ESG approaches create a level of engagement and credibility that can tip consumer perceptions—as well as regulatory and peer-group acceptance—of the positions companies take on the safety of their products. Using ESG-oriented guidelines, such as requiring suppliers to abide by the kind of Restricted Substance Lists mentioned above, enables businesses to point to concrete examples of change in action.
Likewise, using third-party screening tools instead of internal safety assessments alone shows that a company is committed to transparency—to letting the ESG chips fall where they may, even if a business might need to revise its products and overall operations. Companies with ESG programs and a track record of positive influence on their supply chain can then rely on specific, measurable action should questions later arise about their commitment. ESG principles are big-picture guidelines—but their practical, day-to-day implementation can make an enormous difference for companies looking to satisfy the variegated demands of consumers and regulators alike.