Boardroom buzz: Cambridge dean on the business of sustainability and the sustainability of business
IN BRIEF
- The first step to design, adopt and implement a sound ESG strategy is to realize that its three components are closely intertwined.
- When it comes to environmental sustainability, it’s not just green investments, technological breakthroughs or government regulation that will save the day. We need companies — and consumers — to change.
- Business does bear a responsibility beyond making a profit. It can be a positive force for change; it can be part of the solution.
There’s a buzz in boardrooms and C-suites around the world. The trinity of environmental-social-governance, famously known as “ESG,” has become all the rage. Company leaders have at long last realized people’s trust in business has deteriorated to the point where only a long-term commitment to societal betterment that walks the talk will reverse the suspicion of some who see corporations as a source of inequality, pollution, and corruption. The good news is that there’s a business case to be made in favor of implementing an ambitious ESG agenda, one that could help companies do good while doing well.
The first step to design, adopt and implement a sound ESG strategy is to realize that its three components are closely intertwined. Making progress along one of the dimensions is not possible without paying attention to the other two. Attention to social issues is needed to improve the environment because climate change and environmental pollution is leaving some people and groups behind. To align interests, perspectives, and actions among companies and the various social groups, governance is key. Achieving environmental, social, and governance sustainability will certainly require collaboration and concerted action.
When it comes to environmental sustainability, it’s not just green investments, technological breakthroughs or government regulation that will save the day. We need companies—and consumers—to change. Thus, governance is essential: We need to find institutional arrangements whereby the various actors collaborate—including scientists, opinion leaders, business executives, government officials, and consumers—to reinvent both production and consumption.
The second crucial phase involves understanding the business case for ESG. The social dimension is perhaps the right place to start. Equity promotes social harmony, and the lack of it exacerbates social tensions. Inequality and injustice have deleterious effects both inside and outside the firm. They can undermine employee morale, discourage collaboration, and contaminate the work atmosphere. While effort and good performance need to be rewarded, attention to the social dimension is needed to convey that the field is actually level. In fact, equity inside the firm can lead to higher productivity, creativity, and performance. Equity in the wider society is also good for business to the extent that a fractured society is detrimental to cooperation and the formation of goodwill. Thus, the business case for equity is clear in the long run, although there’s always the temptation of thinking about running with a greater share of the pie in the short term.
Environmental sustainability also makes good business sense for at least three cardinal reasons. One, consumers and investors are increasingly focused on the impact of the economy on the planet. Investments in sustainable products, services, facilities, and production processes will definitely pay off if investors and customers are willing to walk away from a specific firm that doesn’t make enough of an effort in this area. Two, there are powerful network effects at play because companies that do not go down the path of a sustainable future will find themselves ostracized from both suppliers and customers who expect everyone to do their best to save the planet and secure natural resources for future generations. And the third reason is that developing technologies, designs, and approaches to improve sustainability will help companies create the competitive capabilities needed to stay on top for a long time to come. The expectation is that the market, guided by its own designs and by government regulation, will afford a premium to companies that are prepared to meet the challenges of sustainability.
As the third pillar, good governance will always pay off in terms of rebuilding trust, ensuring social stability, and aligning stakeholder behavior with sustainability. We live in a world in which governance deficits are rampant, a situation that has led to multiple frictions, tensions, and conflicts at all levels, from the local community to geopolitics. In many instances, the problem lies in the sheer absence of governance mechanisms. The business case for governance is all about filling voids, pursuing missed opportunities, and ensuring that the whole is more than the sum of the parts. Business thrives on the stability that governance mechanisms provide. Good governance brings the best out of each stakeholder while simultaneously making their preferences and strategies mutually compatible for the common good.
Attention to social issues is needed to improve the environment because climate change and environmental pollution is leaving some people and groups behind.
In order to meet the challenges before us as a society, businesses must be ready to be a force for positive change towards:
-
Social equity in the sense of providing a level field of opportunity so that employees are driven to be productive and creative, knowing that their efforts will be duly compensated in a commensurable manner. Companies need to turn themselves into part of the solution to the problems of inequality, discrimination and bigotry, ensuring through new governance mechanisms that they let key stakeholders design the role that they prefer to play in the firm and its surroundings, especially when it comes to sustainability.
-
Environmental sustainability defined in a broad way to ensure prosperity and quality of life now and in the near and long-term future. Environmental pollution and climate change are two important aspects to address, and companies can help both by changing their own ways and by encouraging their customers to follow suit. For example, it’s important to keep in mind that one-third of food gets wasted, people purchase on average over 70 pieces of clothing per year, most of which they use only once, and 30 percent of the time spent driving in downtown areas has to do with finding a parking space. The scope for improvement is enormous.
-
Governance that avoids unnecessary conflict, leaves nobody behind, and ensures positive societal returns. Much conflict can be attributed to defective (or absent) communication, failure of negotiation, and lack of institutions to channel differences of opinion and grievances. More broadly, good governance provides the rules of the game to ensure that problems are addressed, opportunities pursued, and rewards allocated in a just way.
Business does bear a responsibility beyond making a profit. It can be a positive force for change, it can be part of the solution. Because of their sheer size and influence in the economy, companies must be engaged in sustainability. Moreover, the business of sustainability is becoming a key and increasingly big part of the economy. Ultimately, if companies adhere to ESG principles, they will ensure the sustainability of business, its credibility and its prosperity.
Environmental pollution and climate change are two important aspects to address, and companies can help both by changing their own ways and by encouraging their customers to follow suit.
