The rise of ESG

For sure you are hearing the acronym ESG more and more: three little letters with a very big meaning in our world today - Environment, Social and Governance. And nowhere is this more important than in the SME business space, where over 5.58m in the UK alone are beginning to really make an impact in their adoption of sustainability practises as these continue to evolve.

Importantly ESG is multi-faceted and considers the true meaning of the triple bottom line in approach, giving a great opportunity to consider a broad mix of different issues when it comes to talking about sustainability - from emissions, climate change and Net Zero, diversity and inclusivity of the citizens who are in and around the business, the prosperity through financial performance - and how these all come together to drive organisational growth.

ESG is a burning bridge, can we afford to sit on our hands?

Fast becoming a staple of our business language – it derives from a philosophy driven by the United Nations for the past decade - that our development, our growth has to be sustainable; that we all have a part to play; and that we can all work towards a better world. So how important is ESG? Is it a burning bridge or a bridge to cross when you come to it?

Part of our job is to help business leaders make decisions of all types and the first step to see if there is a decision to be made is to ask the do-nothing question? Can we sit it out? 

Over the past few years, we have been working through what it means to be in a Post Brexit position, living with Covid after this global pandemic brought the world to pretty much a standstill situation for many many months, and now we are watching our neighbours in Eastern Europe fight for their independence, at the same time as we face the highest inflation for a decade. And in each case doing nothing has not been an option, although it is always easier to see that with the benefit of hindsight.

It is the same with ESG, the idea that earth’s resources ARE finite, that as business-people we can’t just focus on profit without considering our broader impact on these resources. Events of the past few years have prompted us all to reassess our priorities and highlighted the role that business can play as a force for good. And surprising as it might seem, it is actually small and medium businesses who are making the greatest difference, independent individuals making a stand and working together to have a bigger impact. Of course, social activism, and philanthropy are not new, liberalism, the Quaker movement, Bourneville and Port Sunlight are historic examples of business-people speaking out and taking action for the security of business, and society.

If a decision is inevitable then it comes down to a leadership judgement on timing and deciding when is soon enough. And whilst we do have some time, like other resources that time is running out - and unless we start to make some changes individually, collectively and decisively to ensure that we are investing our resources wisely for the good of People and ultimately the Planet we live on, we will start to experience some changes we might rather not - I am sure you have seen some of the images impacting part of the world and the citizens who live there already as well as the finding so of the latest IPCC report this week and in the end this will put our Profit at risk.

Let’s look at the worst-case scenario: fight, flight or freeze? When the bridge is burning in front of you, or behind you - what do you do? Put the fire out? Run for it? Turn back and find another route? Run faster and get to where you need to be quicker? These are all options, and only you will know what this means to you and your business and world around you. It will impact us in different ways, and we need to do what we feel is right for our situation. Though less glamorous, fire prevention is definitely better than fire fighting.

People look at sustainability in the same way – not knowing which way to turn. should I just stamp on this and make it go away? Turn a cheek or blind eye and forget it’s there, at least for now anyway? Or maybe put everything into it and forget the core of what we and our organisation are all about? This is all about finding that happy medium - being proactive to the right level for our business, the people or citizens who are involved in and around it, and the environment around us both near and further afield to ensure we are playing our part. This is thinking about how we run our business, our governance, that ensures the impact, the resilience, and the sustainability of our actions.

When it comes to that decision, we can wait for legislation, typically starts with big companies, so what about the more than 5 million SMEs that employ half of the workforce and generate half of the revenue. And ESG is just a measure of all of those impacts, on People and Plant and Profit, none of which can be ignored.

How does ESG work?

There are lots of representations of ESG and sustainability; yet there are a few which really help to define what each key element really stands for, and how they truly inter-relate.

The Venn diagram which exists to show the overlaps and sweetspot is one that seems to be moving out of favour moreso these days - too many believe that a greater focus on one area or another, or where you make bad decisions in one area or another, can’t and won’t “balance out”.

A DOUGHNUT model developed by economist Kate Rayworth with the idea that we exist economically within the ring of a doughnut, somewhere between the surrounding environmental limits whilst seeking to exceed in the middle social minimums. It shows the current carrying capacity of the planet – nothing can exceed this limit . Inside this you have society, and society will control how big the economy can get. Limits of growth remain with the planet “sphere” or ceiling (finite)

And then there is this WEDDING CAKE made from the UN SDGs defined by 17 Goals to be achieved by 2030:  Decent Work, Responsible Consumption, Equality, Quality Education, Climate Action etc. 

The foundation of all three models goes beyond legal compliance to achieving harmony or balance “Meeting the needs of the present without compromising the ability of future generations to meet their needs”. And really, the word Sustainable should always go hand in hand with Growth or Development and this balance cannot be achieved alone, it needs the involvement of all your stakeholders: Colleagues, Customer, Suppliers, Investors and Community which is why Goal 17 is “Partnership”

What does ESG look/feel like in practice?

From the inside it’s probably hard to see, or feel but from the outside it looks like a good business- sustainable growth is not a fad but a business imperative, addressing not only the climate emergency which we are all facing into, but also broader environmental and social themes as well as how we bring great stewardship to bear in our organisations to help drive our businesses forward. 

And ESG is about how to MEASURE each of those impacts and MANAGE them like you would money, Governance is about good management, good leadership paying the same attention to your other impacts as you do to your finances, factoring it in to your decisions as you go, not as an afterthought. And it means measuring your business on more than money, so choosing targets that you believe in and then planning and managing what you measure.

But let’s start with Profit, the economics of your business and how you make money to reinvest in the right things to ensure your future prosperity. If you want to consider and support the social and environmental vision you have, trying to do the right things by people and the planet - then it is essential to focus upon the profitability of your enterprise to bring the flow of cash needed to make the right things happen. 

So let’s not be shy about Profit, business exists to make money, that is just a fact of life as without it that business would simply not exist; it is how that organisation chooses to invest the money that often interests others, and how it manages its growth trajectory.

Sustainable investment as part of any strategic plan is a hot topic, and something that still needs to offer an ROI like any other investment a company looks to make across its ways of working. Ideally that return should be both financial and reputational - this becomes the best combination to catapult a business into a strong position of sustainability and able to face into the future - which let’s be blunt, it is probably the toughest it’s been in most of our careers

Typically the things that need to change centre around prosperity (Profit) and here brand sustainability comes to life - ensuring that your business has the best brand offer which is fulfilling a customer need, especially relative to the competitive set. Sustainability has to be profitable - otherwise it is not sustainable! Businesses with purpose outperform their peers by 42%

Businesses are used to thinking about the financials and money flowing in and out of their business – with ESG you need to apply a similar level of consideration to the flows of E and S of this approach to a sustainable business. It helps to get you moving forward, alongside Profit you just need to put People and the Planet into the narrative, in simple terms.

So done right, ESG feels like a good habit, the way we do things, Done wrong it’s just another ticklist

But it is not always that simple to find the balance, because of the interactions between the impacts and your decisions. Does that mean a trade-off? A hard decision? Or rather finding some sense of balance, not just one of the three at any cost.

This is where it helps to think “IMPACT BACK” and to be prepared to report your impact just like you would your finances. Outcomes not just outputs