From CSR to ESG: A Shift to Better Business?
Recently, we hosted a panel discussion with Covington & Burling LLP, which honed in on a topic that has dominated businesses and legal publications these past few years: Environmental Social & Governance, or ESG. Both Corporate Social Responsibility (CSR) and ESG share a similar origin in the desire from companies to create and implement practices and policies to positively impact the world. Some use the two terms interchangeably. However, there are distinct differences between CSR and ESG, which have resulted in companies moving from one idea to the other.
The Corporate Social Responsibility Evolution:
CSR was the precursor to ESG, and it is important to acknowledge that we wouldn’t even be discussing ESG today without CSR. The concept was first credited to economist Howard R. Bowen, who published the ‘Social Responsibilities of the Businessman’, the first comprehensive discussion of business ethics and social responsibility.2 Many credits this work as the foundational book on CSR.
CSR was a moral and ethical expression of how an organisation behaved towards society and the world at large.3 While first gaining momentum in the 1950s and 60s, CSR really came into the spotlight in the 1980s with the growth and expansion of global conglomerates.4 While initially, CSR was an informal, self-regulated expression of a company’s desire to do good towards society, the concept was cemented when in 1971, the Committee for Economic Development introduced the idea of the “social contract”.5 The social contract is sometimes referred to today as the license to operate and is based on the idea that a business can only function with the consent of the public. Consequently, a business should also serve the needs of the society in which it operates.6
CSR met its fall from grace primarily due to the lack of transparency around policies, initiatives and outcomes associated with it. A key fixture of CSR is that it is self-regulated by the company.7 Unfortunately, for some organisations, CSR became more of a marketing exercise than an important strategic initiative for their bottom line.8 A number of famous cases epitomised this and are today ingrained in the minds of consumers, employees and investors alike. From a famous vehicle manufacturer circumventing emissions controls to gain the upper hand on their competitors, to sweatshops in Bangladesh, and even aeroplane manufacturers cutting costs at the expense of safety – which was a stroke of luck for our profession as suddenly we recognised a great need for Compliance expertise, and many companies began to build up huge departments from scratch. If this always had been motivated by the “Social responsibilities of a businessman” or rather the request of authorities like the SEC or DOJ, one can only guess but cannot say for sure.
The ESG Revolution:
Where CSR fell short, ESG became the preferred route forward. There are three key facets to ESG which include: Environment, addressing climate change and protecting the planet; Social, addressing the needs of all stakeholders, not just shareholders; and finally, Governance, which emphasises the need for transparency and accountability when it comes to ESG policies and performance.9 In practice, this may look like our commitment to plant coral for each candidate we place (in partnership with Plant 1 Million Corals), our commitment to hiring interns each year in support of the 10,000 Black Interns initiative, or our commitment to the AESC’s diversity pledge.
Where these two concepts differ really comes down to the enforcement of their associated policies. Where CSR was self-regulated and adoption of CSR policies and initiatives were at times motivated by competitor adoption of such practices, ESG is today, in many cases, regulated and enforced by governments. The SEC in the US created an Enforcement Task Force Focused on Climate and ESG Issues, and the EU’s Sustainable Finance Disclosure Regulation means that organisations must reorient their investments to more sustainable ones.1011 These are only a few examples of many legislative enforcement actions coming from countries around the world. While the US and their legislation historically were a big driver, the EU gets more ambitious recently, with its Supply Chain Act or the Corporate Sustainability Due Diligence Directive in the legislative pipeline. Especially the Supply Chain Act, which drives many of our clients as the criteria is very strict and all of our clients are affected, even the hidden Champions in the “Mittelstand”. While the legal requirements and possible sanctions are one thing, there is still the power of the market and consumers – “public outcry” is something that can get very expensive for companies and their reputations in the long run.
Consumers and employees have growing expectations that organisations engage in ESG. In a recent study, 76% of surveyed consumers said that they would stop purchasing from companies that had a record of poorly treating the environment, their employees, or the community in which they operated.12 Still, another survey found that despite the increase in the cost of living, 78% of surveyed consumers agreed companies had a responsibility to be good citizens, and 71% of them expected companies to launch ESG action.13 In one of those same surveys, 86% of employees said that they would prefer to work for organisations that cared about the same issues they do.14
The Future of ESG:
The growth of ESG doesn’t show any signs of slowing down. Estimates say that by 2025, ESG assets under investment management will reach an incredible $50 trillion. In line with this projection, 71% of surveyed business leaders believe that eventually, no investment decision will be made without considering ESG.15 A driving factor of this could be the continued and growing concern around climate change; in the U.S., investment firm Blackrock’s CEO Larry Fink said that “climate change has become a defining factor in companies’ long-term prospects.”16
Reporting on ESG will continue to grow in importance as consumers, employees and shareholders increase pressures on organisations.17 Already, there is a market for reporting tools focused on ESG. This will continue to grow in importance as governments such as the EU continue to pass legislation, such as the impending Corporate Sustainability Reporting Directive in 2024 and in the US, where the SEC’s changes to the Investment Company Act Names Rule, which aims to prevent greenwashing and Human Capital Management Disclosure which will include DE&I reporting.1819
The environmental and social challenges the world faces today are complex and urgent. The stakes are getting higher. That’s why value-led sustainability is everybody’s business – not only for companies and their stakeholders. I personally recognise among family and friends, that there is an increased awareness to act sustainably and try to make a difference – not using the car that often, buying local food including less meat or trying to avoid plastic where possible. But at the end of the day, the decisions that have a real impact are taken in the headquarters of listed companies whose share price depends on the socially cost-free burning of fossil fuels. And as long as countries like China, Russia, India and even the US, where we even see a backlash on ESG, do not support the common goal, we do risk running out of time. It is to be hoped that ESG will also pay off economically and that efforts to protect the climate will produce innovations and new technologies that will then convince more states and capital to take the sustainable path. There is not much time left!