ESG Can Bridge the Gap Between Industry and Society
Customers, especially younger generations, law- and policymakers and interest groups increasingly exert pressure on companies to take a clear stance on social issues and the impact of their activities on the world around them, and to implement policies accordingly. How do executives deal with this reality? For a series of articles on the ‘company of the future’, an initiative of Management Scope and A&O Shearman, we recently engaged in discussions with business leaders and experts on this issue. What stands out is the positive attitude. The European CSRD directive, for instance, is generally not seen as prescriptive and/or unnecessarily coercive, but rather as a formalization of the path that organizations already, out of conviction, want to pursue. Of course there are companies that stay behind, says Jan Rotmans, professor of transition studies, but for those who embrace the transition ‘the new obligation is mainly a question of refining existing systems, as sustainability is already in their DNA.
Bridging the gap
What is significant is that our discussion partners view ESG legislation primarily as an opportunity to bridge the gap between industry and society and to win back the trust lost in recent decades. It is encouraging that the standardization in CSDR reports will allow real performance to be distinguished from greenwashing, says Marco Waas, chief technology and sustainability officer of salt and chemicals company Nobian, for example. He also expects the transparency created by those reports to ‘open the door to re-engaging with society.’ According to RWE Generation's COO Marinus Tabak, complying with ESG legislation also provides opportunities in the labor market. The current and future generations seem eager to work for organizations that contribute to ESG objectives, he says. Sustainability ambitions and performance are therefore a growing prerequisite for recruiting and retaining sufficiently qualified staff. Unfortunately, Tabak says, many organizations fail to explain their real social impact to the public in concrete terms. ‘That is still a große Baustelle (under construction)’. ‘We can certainly be more vocal about the fact that we play a crucial role in energy transition,’ agrees Dyonne Rietveld, country chair for the Benelux at energy company Uniper. ESG legislation is vital in this regard, she argues ‘as high ambitions and concrete targets can set things in motion.’
Discussion on preconditions
Due to pressure from legislation and society, combined with the threat of lawsuits, many companies do not, or no longer dare to, commit to ambitious targets. This is something we notice on an almost daily basis in our discussions with executives. The inherent will to do the right thing quickly turns into an anxiety to not be able to achieve set goals. This leads to risk-averse behavior and often leads to a downward spiral. This is unfortunate, says Marco Waas, as ‘ambitious goals - even if they are not achieved - result in better outcomes than less ambitious goals which are achieved.’
Leaders therefore need courage to set those high ambitions. At the same time, more realism is needed from society. The fact is that organizations seldom have total control over whether ambitious goals can be achieved or not. Geopolitical tensions, for instance, can cause the unavailability of the requisite raw materials for a transition. Political circumstances and social perceptions are also subject to change. The Netherlands, for one, need more discussion about the dilemmas companies face and the preconditions needed for achieving ESG goals. That this realism seems to be lacking at the moment, Dyonne Rietveld argues ‘does not contribute to positive energy for tackling the matter.’
Less polarization, more dialogue
A precondition for daring to pursue ambitious goals is for the government to make fundamental choices - on technology and fuel types, for instance, in the case of energy transition - and not immediately deviate from them in the event of the next crisis or a different political wind. Only with consistent and long-term government policy can companies chart a realistic and financially sustainable course, especially given the (often significant) investments required and the choices to be made. The necessity of factoring in uncertain policies inherently requires caution. Moreover, swerving government policy is an obstacle to open dialogue between industry and society. Today, NGOs and other action groups tend to get on the offensive - as the crisis is happening now - while companies are on the defense because they feel compelled to play it safe.
Having a dialogue with a knife on the table, because of threatening lawsuits or disruptive actions, does not work anyway, notes professor Jan Rotmans. ‘I think the current polarization is lethal. We need far more connectors and commuters (...). A transition always arises from positivism - not from cynicism and negative thinking. If you constantly oppose and polarize, you only lose time and energy, and that is not tenable at this stage of the transition.’
We expect that ESG legislation can help establish a less polarized dialogue, based on transparency, correct information as well as mutual understanding of each other's dilemmas and concerns. In doing so, the industry must suppress the tendency to repeatedly explain its own position, argues Marco Waas of Nobian. ‘We must listen and understand what the problem is first, before we can be understood.’
Conversely, activist groups must realize that the transition is condemned to failure without the commitment of big companies, and that ‘listening’ cannot be a one-way street.
Sense of urgency
In this series about doing business in the future, we examine what companies must, can and want to do right now to still be ‘doing the right thing’ five to 10 years from now. When it comes to ESG, perhaps the current polarization seems to be the main obstacle to taking big steps forward. Organizations that make robust statements about sustainability, coupled with ambitious targets, are criticized and may even face a lawsuit if, due to whatever circumstances, they do not (yet) live up to those ambitions afterwards. This can lead them to set less ambitious goals - for which they are in turn criticized. Damned if you do and damned if you don't.
In that light, it is positive that companies see ESG legislation as an opportunity to bridge the gap with society. Since the outbreak of the war in Ukraine, ESG themes such as climate change, energy affordability and food security are no longer remote issues. The COVID pandemic showed how important cooperation and solidarity is in times of crisis. Among other things, it allowed the rapid development of vaccines, boosted international cooperation, created new ways of working and accelerated the development of digital tools. When it comes to ESG, the triangle of society, government and business should think creatively about the steps needed now to be able to say in 10 years' time: we did it. Because if we, in collaboration, succeed in addressing the problems now, everyone will be better off in future.
This essay was published in Management Scope 09 2024.