Dr Agata Rudnicka works at the Department of Logistics at the Faculty of Management of the University of Lodz.
Concerns related to climate change, dwindling resources or the growing public awareness of human rights abuses are resulting in increased business attention. As a result of the increasing pressure on companies, various concepts have been developed so as to support the management of the environmental and social dimensions. ESG is one of them.
What is ESG?
ESG stands for Environmental, Social and Governance, which is translated as organisational governance. The idea of ESG is to show how companies approach environmental protection and human rights, especially in areas of their activity where their impact can have the greatest effect on society or ecosystems. In practice, it means taking a detailed look at their organisational processes and value chain relationships, and meticulously assessing social and environmental risks.
Examples of social risks include, among other things, forced labour in supplier factories, non-compliance with safe and hygienic working conditions or discrimination. In the environmental area, this could be: the risk of deterioration of water quality or its lack due to climate change, the risk of losing customers as a result of changing consumption patterns to more sustainable ones, the risk of supply chain disruption by increasing weather emergencies, etc.
The essence of ESG is the response of companies to identified topics of relevance. Companies are to set goals and implement actions to improve the situation. In the case when organisation's current impact is positive and it has tackled a particular challenge, e.g. the elimination of plastic in a particular process, subsequently implemented initiatives are expected to sustain the good results and lead to even more ambitious goals
– explains Dr Agata Rudnicka.
Why the interest in ESG?
A company focused on making a profit has not always considered the wider context of its activities. Even today, in an era of visible problems, not every organisation has the motivation to act in an ethical way that does not cause harm to people and the environment if this is not required by law and effectively enforced. Hence the need to integrate the voluntary concept of social responsibility with legislation attempting to regulate the area of sustainable development to give it a more structured framework. Sustainability, expressed in terms of a measure of achievements in various ESG areas, is seen as an essential link in achieving ambitious goals that serve the environment and nurture social respect and well-being. The increase in business interest is evident, as evidenced by, among other things, the number of thematic conferences and events with ESG in their titles.
The adoption of the Corporate Sustainability Reporting Directive (CRD) further accelerates the need to impose a social and environmental perspective on everyday business activities. It encourages, but also obliges, an analysis of the consequences of the interventions made or not made for the company and its environment.
The increasing access to information through social media must also be taken into account. A few years ago, some information had no chance to reach the public consciousness. Today, the activities of watchdog organisations and publicising of various issues by affected people develop knowledge and make it necessary for companies to approach their various decisions with more care because their results may get revealed
– adds Dr Rudnicka.
Consumers themselves and their purchasing behaviours are changing. Concern for the environment is expressed by a large part of the population and some of the concerns translate into not buying things that are considered environmentally unfriendly. Habits are changing, we read product labels more often, reach for second-hand items or modify our diets. We are working to conserve water and energy resources. The situation makes us more sensitive to things that not long ago did not arouse our wide interest. Investors constitute one of the groups that initiate business changes. This is a group of stakeholders who care about the company's profitability and future sustainability. Strategic environmental and social action can ensure this. In addition, investors observing the market reactions are increasingly unwilling to invest in companies that contribute to the environmental crisis.
Is change easy?
Learning a new way of thinking about your business may not be easy. It requires refocusing the existing strategy and making space for issues that may not have been a priority so far. In practice, this may mean having to modify the set objectives, redefine the scope of cooperation with suppliers or look for alternatives to production methods. This can breed resentment towards ESG and cause this approach to be treated as an unpleasant obligation.
It seems that the more attention companies pay to reducing the negative impact of their activities, the easier it is for them to accept the new reality. For organisations looking only through the lens of narrow economic categories, complementing them with social and environmental dimensions may seem more difficult, especially if it means incurring additional costs. The transformation process itself should be treated as an investment that will allow to continue the business in the future. Companies are already preparing for a zero-carbon future by developing decarbonisation strategies and emission reduction plans, seeing them not only as a challenge but also as an opportunity for further growth.
The pattern of overproduction and overconsumption has not worked out. The incurred social and environmental costs are considerable. Even if the willingness to manage the social and environmental dimension is still not high among some actors, the initiated processes to 'fix the world' cannot be stopped.
Source: Dr Agata Rudnicka, Faculty of Management, University of Lodz
Edit: Communications and PR Centre, University of Lodz
Photos: Bartosz Kałużny (Communications and PR Centre, University of Lodz)