In the world of corporate speak, the abbreviation ESG has found common currency among policy-makers, industry chieftains and the commentariat. Shorthand for Environmental, Social and Governance and a placeholder for corporate practices that prioritise these values, ESG is now a critical component of regulatory frameworks and global investment metrics. But it might be necessary to travel back a bit in time to understand the birth and relevance of ESG.
More than 40 years ago, two leadership appointments on either side of the Atlantic had a lasting impact on global business protocol and philosophy. Ronald Reagan was elected US President in January 1981, after Margaret Thatcher’s election as UK Prime Minister in May 1979. Both had a tremendous influence on the global economy, introducing policies that shrank the state’s influence while providing greater agency to markets and the private sector.
The period thereafter was marked by corporate excesses, and repeated demonstrations of how markets are unable to self-correct. There were also repeated betrayals by the private sector: the greed-is-good phase of the 1980s; the accounting frauds by Enron and other large corporations to assuage shareholders and paper over misdemeanors by avaricious chief executives in the 1990s and 2000s; globalization not delivering promised benefits; over-financialisation of economies culminating in the bruising financial crisis of 2008. Over time the structural limitations of private markets became evident.
There is no precise moment when the tide turned, but it is quite likely that the 2008 financial crisis was the pivotal one. There was a groundswell of mass revulsion with the corporate sector and its abhorrent practices. The global economic shock saw millions fired from their jobs for no fault of theirs while mendacious bankers walked away with eight-figure bonuses and severance packages. The limited, but popular, success of the Occupy Wall Street movement symbolised the growing distaste with corporate practices. Another factor, coincidentally, focused popular attention on companies: growing concerns with climate change. The corporate sector’s responsibility towards society and the environment could no longer be shrugged away. Quite a few companies have internalized the need to change their vision, and are looking beyond the singular, obsessive aim of maximizing shareholder returns. This mission has taken on the acronym ESG.
In their book, Outlast: How ESG Can Benefit Your Business, Mukund Rajan and Col. Rajeev Kumar explain that the world is now divided into companies that take the ESG mission seriously and those that pretend to care about ESG. This is not a manual on how to implement ESG and impress global fund managers and regulators. It is an impassioned argument, an articulate appeal, for a business grammar of a higher order, one that benefits shareholders and stakeholders alike.
By and large, markets and investors have endorsed ESG, providing a higher value to adherents. Over the past few years, there have been record flows into ESG-themed funds. Some of the largest sovereign wealth funds, or global investment vehicles run on surpluses generated by individual governments, have drawn up ethical frameworks for investment.
There is still some reluctance to whole-heartedly implement ESG norms because of the mistaken notion that it is problematic for the bottomline. Rajan and Kumar argue robustly, and provide extensive research to insist that companies must overcome such reluctance and invest in the ESG mandate seriously. There are many compelling reasons to do so: it improves the company’s valuation, enhances its business resilience, and makes the company a responsible citizen.
The authors’ experience as senior executives in the Tata Group, and their understanding of the linkages between how rewards accrue when businesses act responsibly, informs their over-arching thesis. In an era of shifting expectations and changing priorities, the authors argue that any company’s core purpose and values, and the ability of its leaders to successfully embed these values in the organizational culture, will determine its staying power.
Rajrishi Singhal is a senior journalist and policy consultant
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