Pacesetter Research: Prioritizing the "G" in ESG, Enables the Integration of the "E" and the "S"
With rising pressure from stakeholders on "E" and "S" initiatives, the "E" and "S" have typically dominated ESG conversations however prioritizing the G may facilitate the integration of all three components
August 14, 2023 at 07:46 PM
6 minute read
With so much attention from multiple stakeholders (i.e investors, employees, customers, local communities, regulators, NGOs, and suppliers) on ESG (environmental, social, and governance), it can be argued that ESG has become a business phenomenon unable to be cast aside for the time being. In the 2022 edition of the EY US CEO Survey, which included a mix of public and private business leaders, it was reported that 82% of US chief executives see ESG as a value driver to their business over the next few years. In response to this need from business leaders to understand ESG and all its intricacies as it relates to their organization, professional service providers have increasingly developed service offerings to help clients best navigate through ESG challenges and maximize growth opportunities. For example, among law firms, the 2022 Wolters Kluwer Future Ready Lawyer Survey found that 50% had created an ESG practice in the past three years. As climate disclosure regulations have increased and with rising accountability placed on businesses to run in a socially responsible manner the "E" and the "S" have gained much attention, and the "G" has often been deprioritized. According to a Morningstar Sustainalytics survey of more than 500 CSR and sustainability professionals found that 46% of respondents rated corporate governance as the least important aspect of their ESG efforts. However, as data on ESG becomes more readily available, there may be some early indications that the "G" may now need to take center stage in order to deliver the best value to organizations.
Most understand ESG to be a framework (that is often used by investors) to assess an organization's operational performance as it relates to social and environmental impact. However, before the term ESG made its appearance in a 2004 UN report and became better known in the late 2010s, there were other predecessors with similar purposes. For instance, in the 1980s EHS (environmental, health, and safety) focused on using regulation to manage or reduce pollution produced in the pursuit of economic growth but also to improve labor and safety standards. Then in the 1990s, corporate sustainability evolved as a new framework in which businesses aimed at creating sustainable, long-term shareholder, employee, consumer, and societal value by pursuing responsible environmental, social, and economic (or governance) strategies. By the early 2000s CSR (corporate social responsibility), became the top priority for business leaders.
Historians have argued that the concept of CSR emerged from the growing criticisms of the factory systems in the U.S. (poor working conditions and the employment of women and children) along with the rise of philanthropy where successful and wealthy business leaders were donating to religious, educational, and scientific causes. While this may have been the catalyst for CSR, the introduction of a "social contract" by the Committee for Economic Development essentially illuminated the importance of CSR. The contract brought forward the idea that companies function and exist because of public consent and, therefore, there is an obligation to contribute to the needs of society. This led some organizations to incorporate social interests in their business practices and behave in an ethically responsible manner with their stakeholders. Today, CSR is a framework for business self-regulation, with the aim of social accountability and making a positive impact on society by being environmentally friendly; promoting equality, diversity, and inclusion in the workplace; treating employees with respect; giving back to the community; and ensuring business decisions are ethical. From this evolution it is evident that governance has consistently played an active and fundamental role, making its inclusion in ESG rational.
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