ESG: The Importance of Conscious Commerce
Has capitalism become ‘woke’?
The global economy and the nature of worldwide business has most certainly changed in the last sixty years. Globalisation has allowed businesses to target global consumer demographics, creating mass audiences that had never been seen before. However, the globalisation of trade has instigated a new degree of discussion and scrutiny amongst consumers. Now, social media and review sites allow an abundance of discussion and often facilitate the collectivisation of consumers that feel exploited or let down by the companies that profit from them. This has made image and corporate reputation a paramount concern for businesses as they look to grow in the modern, transparent era of commerce.
Environmental, social, and governance (ESG) guidelines are used to quantify a company’s commitment to sustainability in their business practices. ESG is becoming a vital part of corporate branding, as it not only boosts their image in the eyes of the consumer, but it also boosts returns through the cultivation of a positive company culture and the reduction of inefficiencies.
The notion of ESG – or rather the notion of conscious commerce – first started to gain traction in the USA in the 1950s and ‘60s. Trade unions realised the social value of their vast pension funds, which could be deployed towards socially beneficial investments – seen when US Electric workers invested in affordable housing. The later development of the ‘Sullivan Principles’ promoted corporate responsibility in the US as a response to apartheid South Africa. These principles provided a set of criteria that should be met when doing business with South African firms and were created to apply economic pressure to the country in response to institutionalised racial oppression.
At the turn of the 21st Century, the market started to recognise the empowerment of the ‘responsible investor’, with an introduction of new products and investments that encouraged socially responsible investors. John Elkington coined the phrase ‘triple bottom line’ in reference to new non-financial factors that needed to be acknowledged in the valuation of a company or equity’s value.
The founding of the UN Global Compact facilitated the ‘Who Cares Wins’ report in 2004, which was the first mention of the term ‘ESG’ and provided guidelines for businesses to incorporate its principles into their operations. Alex Edmans later published a paper that showed ESG-centric businesses had a far happier workforce compared to those that disregard them, which, consequently, boosted the performance of their stock by 2-3% a year in comparison to their peers. This cemented ESG adherence as a necessary and sound business decision, thrusting it into the forefront of board-level concern.
But why has ESG taken on such an important role in the operations of businesses worldwide?
Firstly, the possible opportunity for investment is greatly enhanced by a commitment to ESG guidelines. Contemporary financiers and institutions are immensely attracted to entities that can boast a strong commitment to ESG, as it allows them to satisfy their own sustainability ambitions. Many corporations have developed internal strategies that promote and affirm their commitment to sustainable commerce, such as Adidas’ ‘Gameplan-A’, which boosts their image and promotes socially positive trade. Investors that are looking to deploy resources towards businesses that meet these guidelines can add to their sustainability package, which boosts their own global reputation and image.
Secondly, customer attitude is becoming exceedingly ESG-centric as the world seemingly struggles to cope with the issues that are associated with the climate and global economy. A recent study by Accenture showed that the COVID-19 pandemic has instigated a realignment in the priorities of the consumer, with globally beneficial investments becoming more and more vital to a positive customer relationship.
Furthermore, these sorts of investments have genuine potential to make a positive difference in the contemporary economic and social climate. Some companies have a vast amount of capital to deploy – capital that can make a profound difference to social causes. For example, an investment into MA-Change would also support its community funding project, M-Able, which supports the local communities of sports clubs that have signed up to the platform. This means corporations can make a financially sound investment whilst enhancing their profile – a positive indictment of the direction of modern capitalism.
ESG targets need to be realistic and within the parameters of capability; ESG is about making a positive difference to the industries and markets in which the company operates, and obtainable targets set a positive precedent for delivery. These targets, therefore, need to be specific to the qualities of the firm. ESG objectives should be focused on the existing operations and practices of the company and how they can be improved, rather than the cultivation of aims and targets that are beyond the scope of the business.
Accordingly, businesses are applying these principles in a multitude of different ways; the most common and effective way being through internal strategy. Many large corporations have started creating internal policies that affirm their commitment to sustainable practices, such as Diagio’s ‘Society 2030: Spirit of Progress’. This created an association between ESG and their brand and affirmed their reputation to the public and investors by having a sustainability drive. MA-Change has cultivated its own ESG framework, as aforementioned; M-Able. This details our commitment to sustainable commerce and outlines our mission to improve the industries it works in.
To conclude, ESG has become increasingly important as globalised business becomes vital to profits. The transparent, scrutinised nature of contemporary trade means a firm’s success is built on their ability to avoid PR disasters and maintain a positive corporate reputation amongst consumers. Subsequently, an ESG policy has become a clear, attainable way for companies to achieve the status of ‘ESG compliant’, which is becoming a necessity for investment and custom. However, despite the perceivably positive impact ESG has on trade and business practice, there is often a degree of criticism for the practice. Some argue that the corporate takeover of public morality has trivialised and commodified the societal issues they are meant to be tackling, leading to ‘woke capitalism’. This is the idea that corporations are pursuing ‘wokeness’ rather than profit, which puts the system in jeopardy. However, Edmans’ study of ESG-driven companies and the comparable level of profit they make suggests ESG strategies work to the benefit of the business.