Columnists

How ESG is shaping corporate plans

esg

If known economist Milton Friedman were alive today, he would have dismissed any corporate role on social issues as being socialist. In his September 13, 1970 article, "The Social Responsibility of Business Is to Increase Its Profits", Friedman criticised businessmen who advocated "social responsibilities of business in a free enterprise system."

So many decades later, shareholders and consumers worldwide demand more social action from their corporate representatives and agents. As a result, many corporate organisations have changed their strategies to adopt corporate social responsibility (CSR).

Even ardent followers of Friedman are now part of the environmental, social, and corporate governance (ESG) movement, brought together at a conference, "Who Cares Wins" in Zurich.

Considering that community engagement, alongside the concern with the workplace and the environment, is one of the critical pillars of the marketplace, the role of corporates is expanding.

For example, last year, more than 70 percent of investors in one of the largest US retail giants, Costco, voted to force the corporation to develop a plan to eliminate carbon emissions from its supply chain by 2050.

Corporate governance refers to the rules, practices, and processes that govern the organisation. Some of the regulations demand that organisations change their strategies to incorporate issues such as equity, diversity, and inclusion.

The financial sector, for example, developed a framework, the Principles for Responsible Banking, that enables members to spread integrated thinking that benefits society and the environment.

The entire banking sector adopted this framework globally to integrate social interventions in their business strategy and critical business decisions. These include the SDGs, the Paris Climate Agreement and other relevant social initiatives.

One of the founding CEOs of the Principles, Joshua Oigara of KCB Group #ticker:KCB , recently noted that responsible business is about laying the groundwork for future generations of growth.

Therefore, banks must put their written policies into action through a plan to create long-term value through sustainable banking to succeed. According to the KCB Group, these principles will lead to long-term financial success and open the door to financial freedom.

These sectoral changes have also seen sustainability become a new frame that every organisation uses to measure its outcomes and profits.

In less than 20 years, the ESG movement has changed the corporate governance landscape in virtually all corners. And the results are visible. For example, board compositions have changed to include activists, independent and diverse groups, and a mix of director skills.

Just as different corporate organisations begin adhering to ESG, a new disruption is emerging — social media and shareholder activism. Activism can be good or bad. Corporate governance is at a crossroads.

Proponents of activist shareholders and social media in corporate governance say disruption improves performance by gathering crowd wisdom and unearthing new, valuable information.

Some studies now suggest that a strong shareholder voice interferes with the board's primary responsibility of developing and implementing a long-term corporate business strategy.

However, other studies argue that the many changes happening in corporate governance result from increased digitalisation. For example, shareholder activism can easily access data and use it to propagate it to disrupt corporates.

Although there are instances where activism makes sense, it is disruptive. Many boards focus their attention on complex strategic issues of an organisation and create more wealth for the shareholder.

There is a need to consider the complexity of balancing shareholder returns and CSR requirements while putting pressure on governments to invest more in social protection and regulatory responsibilities.