David Gilroy is the managing director of Store Excel
ESG is a scam.” So says Elon Musk. ESG, or to give it its full name, Environmental, Social Governance, garners full-throated support or exasperation and frustration. Why does it stir the emotions? A framework designed to ensure businesses become better corporate citizens, respecting and protecting people and environments, ESG marks a transition from purely profit-driven metrics to those that factor in the broader impact of a company’s actions.
As the B1G1 Movement states, the history of ESG started in 2004 with the late Kofi Annan, the then UN secretary general. Becoming increasingly concerned about the damage business owners were doing to the environment and to social structures, he wanted to find ways to integrate what we now refer to as sustainability into capital markets. The ESG concept was an outcome of a group study conducted by the Swiss government and the International Finance Corporation entitled ‘Who Cares Wins’. This study was hailed as groundbreaking, and it is where the ‘ESG’ acronym was coined.
Since its inception in 2004, ESG has broadened into a full-blown framework determining how responsible businesses should operate. The environment piece takes in carbon emissions, air, water pollution, biodiversity, renewable energy and waste management. The social element wraps in customer satisfaction, data protection, privacy, gender, diversity, human rights and labour standards, While the governance part covers tax strategy, executive remuneration, fair and reasonable compensation, donations, political lobbying, corruption, bribery and board composition.
A mighty agenda to absorb in addition to all the other demands on a business. As we know, tight operating margins and upward cost pressures make wholesale a tough industry. Are profits and ethics mutually exclusive? Do businesses have to choose between profit or principles? Should we, as David Cameron once famously said, “cut out the green crap”?
Higher business principles are not new, and they certainly were not invented in the 21st century. A forerunner of ESG was started by the Quaker movement in the 1600s. Notwithstanding the overarching religious context, the Quakers have always conducted business to a well-established set of principles based on truth, integrity, simplicity, fairness, respect and a deep-rooted Quaker tradition of not overusing the Earth’s resources. Famous Quaker start-ups include Clarks Shoes, Bryant & May matches and Huntley & Palmer’s biscuits. Probably the best-known are chocolate companies Frys, Rowntree’s and Cadbury. Founded in 1824, Cadbury is a good example of Quaker principles in action. In 1849, it moved the business away from beverages to its own brand of chocolate. This was Cadbury’s breakthrough moment. The company innovated – boxed chocolates, Valentine’s Day presentation packs and Easter eggs were all new concepts at the time.
A Bourneville factory was built on the edge of Birmingham to improve links to canals and railways. In 1893, George Cadbury purchased a 120-acre site at his own expense, where he built a model village close to the works for the workforce which would “alleviate the evils of modern, more cramped living conditions”. The company went on to become a highly respected and profitable company with a social conscience.
Modern Quaker values chime with ESG principles. Study its stated codes and you will find that staying true to contracts and paying invoices on time are core to its business ethics.
John Lewis Partnership (JLP), which is a leader in ethical business practices, seems to be taking a kicking lately from commentators. John Speden Lewis devised and then formalised the partnership in 1929. He announced that John Lewis’s profits would be shared among all its employees. The partnership’s aim was not to maximise profits, but to generate sufficient profit for its purpose.
Managers would be accountable to staff through councils of elected representatives. This pioneering democracy worked well until recent years. In this century, the department store business model has experienced serious stress from market conditions, notably the pandemic, online shopping and the rise of competitors.
Observers argue JLP has lost focus on retail basics in pursuit of worthy causes and employee benefits. Profits have been declining for several years, culminating in a loss of £243m last year. It has backtracked on some of its principles, such as selling off partner recreational facilities, suspending bonuses and junking the ‘Never Knowingly Undersold’ price platform. It also faces a refinancing challenge. Is this a weakness in the partnership model, or a failure in retail stewardship?
Musk’s outburst was a response to Tesla being cut from the S&P 500 Index due to issues around claims of racial discrimination, workforce diversity and early product failures. In his view, this was an unnecessary distraction from the business of growing sales and profit.
Hein Schumacher, CEO at Unilever, reportedly views his company’s promotion of ethical issues via its brands as an unwelcome distraction. There are increasing concerns that ESG is taking on a life of its own without necessarily improving real-world outcomes.
Oliver Shah, in The Sunday Times, warns of waves of impending EU regulation scheduled for ESG-related topics, from gender pay gap, to the environmental impact of employees’ travel, and of electronic devices left switched on in premises.
He says corporate sustainability reporting will apply to all companies in the UK with significant activities in the EU – a definition that includes making more than €40m in sales in the bloc or having more than 250 employees there. In his Harvard Business Review article, ‘The Inconvenient Truth About Investing in ESG’, Sanjai Baghat concludes there is no evidence that investing in companies that publicly embrace ESG achieves better financial returns, nor do they seem to succeed in furthering ESG in any meaningful way.
Most of us have a natural aversion to imposed bureaucracy. Provided it does not become a box-ticking exercise, ESG emerges as a force for the good in business. There is a lot of ESG-style activity happening already in our industry – investment in electric vehicles, the installation of solar panels, conversion to LED lighting, and work on inclusion and diversity in the workplace. Larger companies such as Sysco have taken it to the next level with sustainability training initiatives.
Even for smaller enterprises with limited resources, an ESG plan will add value and can be applied at little or no additional cost. Environmental to include lower carbon emissions, reduction in energy consumption, effective recycling and tighter controls of waste. Social: encompassing good human resource management through diversity, inclusion, good health and safety, and employee rights compliance. Most of which should be happening anyway. Governance: incorporating transparent stewardship, greater diversity at decision-making level, fairer remuneration and executive compensation linked to ESG-related targets.
ESG specialist Miranda Partners cites five key issues to prepare for in the coming 12 months. Regulation to avoid greenwashing will increase and a range of legislation covering emissions and mandatory accounting metrics will come into force. Resource management and biodiversity will gain in importance, with water management coming to the fore. Labour practices will continue to be in the spotlight, including flexible working, diversity and zero tolerance of sexual harassment. Companies must tighten up their data privacy and cybersecurity, particularly with the integration of AI tools into daily work. This is a serious risk to many enterprises and a big one for our sector given the information held on customers and the constant outbound marketing.
Finally, sustainable and resilient supply chains will continue to attract a prominent level of scrutiny.
Whether it is called ‘ESG’ or simply ‘acting responsibly’, many businesses have proved that operating ethically can be profitable and sustainable. Customers may not use the term ESG, but they will increasingly expect their service providers to be able to demonstrate socially responsible, ethical and sustainable practices. Those that do will have a competitive advantage.