Our collective conscience is more globally aware than ever; our planet’s climate is changing rapidly, working conditions remain dangerous in parts of the world, our oceans contain plastic, COVID-19 is devastating health care systems and economies, and inequalities persist. Apathy is no longer an option. To navigate the business environment, a company has to operate with an awareness of its influence for a more sustainable future and it has to know its role in empowering the voiceless in this process.
Industry has faced the sharp end of criticism and is tasked with change. Companies are required to adopt more sustainable practices and participate in a collective responsibility. Previously, companies implemented philanthropic programmes in an attempt to do or look ‘good’ by investing in infrastructure projects. But, again and again, evidence showed they tended to fail after a period of time, projects didn’t factor in the need for sustainability into their initial design.
Companies have become more sophisticated within their operating environments and now understand the nuances of their duty to consumers and to our planet. They recognise a need for greater transparency, improved corporate governance, better environmental performance and a response to stakeholder concerns.
The origins and the evolution – How have we arrived at ESG?
According to Georg Kell in Forbes magazine, the term ‘ESG’ was first used in 2005 in a report by Ivo Knoepfel entitled “Who Cares Wins”. The concept evolved from a recognition of the limitations of the Social Responsible Investment (SRI) movement that came before it. The difference between the two is, SRI primarily uses negative screening such the active non-investment in alcohol, tobacco or weapons to inform investment choices. ESG by contrast, is investment based on ESG metrics—nonfinancial risks material to stakeholders that capture a more complete and transparent picture of performance beyond financial metrics.
A definition of ESG from Investopedia
“ESG criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.”
Readers might also recall the terms Corporate Social Responsibility (CSR) or the triple bottom line (TBL). These terms were coined back in the 1953 and 1994 respectively. A time when there was an increasing realisation by corporations that they could not simply extract value (often in developing economies), without investing locally. They realised they had a responsibility to invest in the communities affected by their presence – especially in the oil and gas and mining sectors, agriculture, manufacturing sites, etc.
For some, these corporate interventions did not go far enough in mitigating adverse impacts and were considered too close to traditional benevolent philanthropy. As a result, some companies sought wider input and began to incorporate stakeholders’ views in the planning of their projects. To this end, International Finance Institutions (IFIs) such as the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD) developed clear performance requirements for large scale infrastructure, with a specific emphasis on limiting the impact on communities and the environment.
With the recognition that large corporations were having the largest impact, the UN established the Global Compact in 2000, this brought together a range of international corporations to lead a new wave of responsible investing. In turn, this led to the birth of Principles for Responsible Investment (PRI) in 2005 and a raft of other sustainable, social and climate-based initiatives.
Corporations began to report on a wide range of non-core business factors, and many have been producing sustainability reports for several years with ever-increasing transparency.
The Baku-Tblisi-Ceyhan Oil Pipeline (BTC)
While working for BP in Turkey on the BTC Project, Michael was asked by a Senior Project Manager to install park benches as the company’s contribution to the in-country community investment programme (CIP). With my career history in socio-economic development at grass roots and donor level, I saw an opportunity to establish a sustainable CIP, relevant to the needs of the 300 communities along the 1,000 km of pipeline route. We had relevant data from an extensive stakeholder consultation programme as part of our commitment to the Social Impact Assessment requirements of the IFC and EBRD. The goal was not to be ‘do-gooders’ but good doers, and implement a impactful business strategy to ensure BP’s long-term licence to operate. The results spoke for themselves, with strong support from communities and international recognition, setting a new benchmark in social performance standards.
ESG as a key element of corporate strategy – an evolution
The evolution from CSR to ESG is ongoing. Where CSR jumps, ESG measures how high. CSR represents a company’s efforts to have a positive impact on its employees, consumers, the environment and wider community. ESG measures these activities to determine a more precise assessment of a company’s actions using clear indicators.
Publicly listed oil & gas firms are beginning to release ESG reports
or at least include an ESG statement in their corporate presentations.
These moves are positive. CSR was generally considered as an ‘add-on’ in times where resources were plentiful (human and financial), but budgets for CSR programmes were often the first to be slashed in difficult times. ESG on the other hand is intrinsically part of a company’s overall mission and strategy and runs through the veins of the business in all departments. ESG, unlike CSR, is no longer an outlier or siloed department that can fluctuate in relevance– instead it impacts a considerable number, if not all operational decisions.
The adoption of ESG strategies is continuing to improve, as companies, development institutions, investors and shareholders, are able to demonstrate greater impact from their investments. Also becoming more globally expected is an alignment of a company’s ESG goals to the UN’s Sustainable Development Goals (SDG). This structure is helpful to companies as they can choose to prioritise their ESG efforts on selected relevant SDG targets.
Increasingly ESG is recognised as fundamental to overall performance success, and highly useful as a risk mitigation tool.
In part 2, I Michael will outline some of the challenges related to the standardisation of ESG ratings and rankings and the application of ESG measures.
About the author
Michael Hoffmann advises on geo-political risk to guide market-entry strategies, stakeholder engagement, mergers and acquisitions and sustainable impact investment. Michael formally held senior external affairs roles within BP and was a director of the Trans-Adriatic Pipeline (TAP).
