Navigating ESG Requirements is a Work in Progress for Companies Pursuing a Greener Future

First-time guest contributor Rashida Salahuddin is the President and CEO of The Corporate Citizenship Project. She has spent most of her career in Public Affairs working for financial services, entertainment, and energy companies. She spearheads the Corporate Citizenship Project to address the challenges and ethical issues related to corporate governance.

Today there are many different reporting standards that define companies around the three letters: ESG. A recent article in Canada’s Globe and Mail described the business of ESG ratings and standards as less than well defined. How do you differentiate whether a company is greenwashing or true to dealing with sustainability challenges? And without agreed to standards of measurement on ESG, how can you truly compare corporate performance. In The Globe and Mail article several different ESG measures were asked to rate the same set of well-recognized companies in high technology categories. The ESG grades were all over the map. 

That’s why I’m happy to feature this posting from Rashida which I hope will begin to shed some light on why ESG as a measure of corporate responsibility is such a challenge, but at the same time why it is important in defining how companies do business as this decade and century unfolds facing the many environmental and societal challenges we have.

The need for more corporate responsibility has evolved for today’s corporations and the next generation of business leaders are being measured by three categories of performance: Environmental, Social and Governance, commonly called ESG. Investors, activists, and regulators now require proactive, community-structured commitment and accountability from corporations designed to be measured equally if not greater than the traditional measures: profitability and shareholders’ return on investment.  

Global capital markets are responding to ESG by attempting to establish industry-based standards for measuring companies in every industry. The demand is for sustainability, eco-friendly business practices, and investment return. And global technology companies and their executives are among those now hearing this ESG siren call and taking proactive measures. 

Why ESG Standards Are Needed 

Although ESG metrics are still being worked out as a standard of measurement in annual reports it hasn’t stopped technology companies and other industry institutions from making promises and illustrating the proactive nature of their ESG efforts. But what is needed presently is an ability for businesses of all types to identify and quantify investor objectives of integration, values, and impact in areas of governance, environment and the social context.

Stakeholders and shareholders increasingly are not interested in window dressing, public relations gambits, and empty promises only for the benefit of a feel-good investor report. They want to know that companies are holding themselves accountable to the promises and commitments made in these three key areas.

So what are examples of ESG principles and metrics? 

• Environmental impact metrics include a company’s overall carbon footprint, adoption of circular economy principles, operational attention to air quality, pollution, energy sourcing and usage, manufacturing methods, and active mitigation steps in addressing climate change issues.
• Social impact metrics look at a company’s workforce as well as the supply chain with which it interacts, including a review of hiring practices, career progress, healthcare provision, flexible working hours, increased diversity and inclusiveness around gender and race and people with disabilities, as well as assessing customer satisfaction.
• Governance impact metrics look at a company’s leadership principles and style, corporate and accounting transparency, shareholder voting rights, workforce feedback mechanisms, and open communication among all levels in the organization including stakeholders and shareholders.

How do you apply a formula and weigh all of these metrics to come up with an ESG score? 

Proxy Advisors Putting Unfair Pressures on Companies 

Many technology companies, specifically, have felt their fair share of pressure to adopt ESG-forward practices. Whether it is a simple change like the reduction in single-use plastics or addressing gender pay gaps, shareholders have made it known they expect companies to look at their internal operations as well as their entire supply chain through the types of metrics described above. The result is a significant overhaul for many businesses and the appointment of a new management category in the C-Suite – the Chief Sustainability Officer (CSO).

Making promises about ESG commitments and holding true to them, however, are apparently two different stories for many. Companies find themselves making ESG improvements and commitments pushed by institutional investors and oversight organizations such as Institutional Shareholder Services (ISS). This has led to a debate on whether these influencers and proxy advisors are too focused on ESG issues, conflicted, and wielding too much power over the executive suite, impairing a business’s operations. 

ISS Hypocrisy in ESG Requirements 

There is even some hypocrisy when ESG assessments are being conducted by organizations that don’t reflect ESG principles in their own operations. Such is the case with ISS, established in 1985 by a group of companies focused on building for long-term and sustainable growth and measuring outcomes using high-quality data, and analytics. Today ISS is a leading measurer and adjudicator of corporate ESG performance. But its own practices are being called into question.

ISS asks that publicly traded companies disclose the ethnicity of each and every member of their boards of directors. It has even been accused of refusing to recommend voting for board slates that do not contain enough diverse representation. But its own founders, Deutsche Boerse and Genstar Capital have a lack of diversity on on their boards even though they have made diversity, equity, and inclusion a priority social standard in measuring ESG. And since standards are not only needed, and must be adhered to at all levels, wouldn’t one call ISS’s own performance a matter of doing as I say, and not as I do? 

Technology Companies Have A Chance To Serve As ESG Models 

Despite the perceived hypocrisy of ISS, other technology companies have the opportunity to bring about change in the ways they do business. In fact, as business models have had to adapt to ESG scrutiny there is evidence of widespread adoption of elements in all three performance categories.

Technology companies are starting to demonstrate they are no longer solely about making money and ensuring a positive bottom line. Now there is a recognition of measuring a positive societal impact. Newly implemented strategies have the potential to drive increased valuations from investors while attracting more qualified employees who are equally committed to corporate ESG goals. And because technology companies are already prone to using data analytics to help in product development and operations, adding standard ESG metrics is a better fit with their DNA and a logical next step.

But the financial markets and investment community need to clearly come to a collective agreement for both definitions and standards in ESG measurement. That continues to be the challenge for all in this emerging 21st-century corporate landscape. Once the metrics and ESG standards are documented and established, technology companies should be able to demonstrate to many other business sectors how to navigate the 21st century with its many challenges.