Back to the Basics, what really is the overarching goal of sustainability and ESG?
In recent times, there have been a lot of interesting headlines in the sustainability arena. ESG is under attack. ESG is a hoax. Indeed, a recent article by Alex Edmans from London Business School proposes a rational sustainability concept to replace ESG. Does that mean sustainability or ESG is irrational? Well, that is the question. Yet the article raised some valid points based on recent events in those countries. A fundamental question is what exactly sustainability and ESG is meant to achieve.
Is ESG the end or a means to an end? In the animal kingdom, humans are assumed to be the most intelligent creatures on planet Earth. It is not for anything but for our ability to reason. If this is true, how do we continue to get bogged down by semantics without addressing the real issues?
The evolution of sustainability has been very dynamic. From the environmental agenda to the call for corporate social responsibility. Companies attempt to do good in CSR and give back to the community. Some businesses are taken to corporate philanthropy; they give money to a cause as a charity and also attempt to do good. Today, the conversations concern Environment, Social and Governance (ESG) and Sustainability.
To bring it home, we should ask ourselves why businesses need to do good.
Business combines factors of production to make a product or service. Essentially, businesses depend on environmental resources for the creation of wealth. This process generates negative externalities in the form of pollution and other social inequalities. In another dimension, the resources used in creating this wealth are finite. If we continue to explore the mineral deposits we have in the world, a day will come when it will get exhausted. If that happens, what becomes the fate of the next generation? Hence the concept of sustainable development. It encompasses intergenerational equity. Thus, sustainability connotes long-term availability of value creation.
While businesses are not the sole generator of externalities, the inequitable distribution of resources means our society is dealing with water scarcity, poverty, discrimination, and labour issues. Thus, there is a nexus between poverty and Environment. In the business-as-usual scenario, it is assumed businesses can continue to explore the environment or contribute to social issues to create wealth without dealing with negative externalities. Yet this is akin to deliberately undermining our sustainability and survival as a species. Throughout history, we have seen many examples of the consequences of irresponsible business practices.
In Nigeria, the exploration of oil has had an untold effect on the environment and society in the Niger Delta region. The destruction of the environment has resulted in severe hardship for the people, and the implication for businesses is a lack of a conducive environment for doing business.
Unsustainable practices that affect the different stakeholders have consequences for business. A business not complying with regulatory requirements will face sanctions that affect productivity and sustainability. These are typical ESG issues that affect business objectives. Thus, the sustainability of a business is dependent on managing these issues. In that case, sustainability seeks to sustain the corporation’s mission, including profitability.
That is the fulcrum of business sustainability. It clearly aligns profitability with responsibility, accountability, and ethical means of doing business. There have been different conversations in the literature on the purpose of business. The doctrine of business for profit is countered by Edward Freeman, who argued passionately that nobody starts a company solely to make a profit but for a clear vision of solving a societal problem.
What exactly does sustainability mean for business?
In simple terms, sustainability seeks to create a balance between economic, environmental, and social dimensions with a core objective of sustaining long-term value creation. Taking care of your workers’ health and safety is a sustainability practice. Ensuring healthy respect and management of environmental aspects is another one. Fostering engagement with the community and genuinely gaining a social license to operate. Pay fair compensation and create an environment that encourages the growth of employees. Promoting diversity in the workforce is another sustainability practice. These are activities with a clear value proposition for businesses.
That is the sustainability challenge. Forget the semantics, ESG, rational sustainability, etc. The core ask of sustainability is the consideration of the environment and social issues that are material to the business and creating a business environment that supports economic, environmental, and social development. It is not irrational, but key considerations that companies should consider to sustain value creation for all stakeholders.
Let’s get to work.