/ 13 April 2022

Ethical business practice in demand

Photography By Jeremy Glyn For Lebo Madiba In May 2019
Lebo Madiba, founder and managing director of reputation management agency PR Powerhouse. Photo: Jeremy Glyn

With social and environmental justice increasingly taking centre stage, businesses now need to embrace environmental, social and governance (ESG) principles in their operations. Investors and consumers are looking to support businesses that are ethically sound and remonstrate against those who are not compliant. If your business has not jumped on the ESG wagon yet, you had better do so now.

In a 2017 lecture at the Gordon Institute of Business Science, visiting American Professor of Operations and Supply Chain Management Soumen Ghosh said retail market businesses were starting to offer customised goods and services based on individual needs and wants. Disruptive technologies, such as the smartphone and the apps on them gave the consumers the power to choose.

Fast forward five years, throw in Black Lives Matter and the coronavirus, and those very same consumers — who are now more politically and socially conscious — base their purchasing decisions on whether the products manufactured cause harm to the environment or communities. They are exercising their power to shape the ethical standing of companies the world over.

This is tied to a business megatrend that has been surfacing in recent years: ESG reporting. Initially, it started as a crucial determinant for sustainability-minded investors, but its principles are quickly being adopted by consumers, regulatory bodies and governments. Businesses are being pressured into demonstrating their commitment to sustainability and ethical labour practices.

One may be forgiven for confusing ESG with corporate social responsibility (CSR), but they differ in plenty of ways. ThomasNet, a product sourcing online platform, says ESG is a set of measurable criteria used by investors to evaluate potential business investments that are both profitable and ethical. CSR, on the other hand, is a business approach in which companies integrate social, environmental, and economic concerns into their values, culture and decision-making processes.

Consumers and regulators hold the stick

Consumers and regulators have shown in recent years that they have the tools and the ability to shape the behaviour of large corporations. Online Platforms such as Avaaz and Ethical Consumer are providing individuals with the power to speak out and take action against organisations that are unethical in their practices. Ethical Consumer even provides a how-to guide on boycotting, and lists boycotts currently taking place worldwide.

In November 2021, South African activists called for a nationwide consumer boycott of oil giant Shell, as the company was about to conduct a seismic survey off the Wild Coast that would affect the communities there. Shell said the consumer action, coupled with trips to the Makhanda High Court, cost them R350-million, with a total loss in excess of R1-billion. A court ruling in February temporarily halted the oil company’s exploration and again dismissed Shell’s and Mineral Resources and Energy Minister Gwede Mantashe’s application for leave to appeal.

Volkswagen’s (VW) Dieselgate controversy in 2015, whereby the US Environmental Protection Agency issued a violation notice for illegal amounts of nitrogen oxide emissions, cost the car manufacturer €30-billion (R499-billion) in fines, compensation and buyback schemes worldwide.

VW has since done a 180-degree turnaround in 2020 by expanding its audits and traceability of battery raw materials for its electric vehicles to conform with human rights, safe working conditions and environmental protection along the supply chain — all the way back to the mines.

These outcomes come off the back of consumers, regulators and non-profit organisations working together in a highly organised fashion, using legal and technological tools to confront seemingly giant opposition. 

Corporate governance as the carrot

Consumers and regulators may score a few victories for ESG along the way, but ESG will only take a foothold within the business through corporate governance. This includes internal audits, integrated reports and public policymaking.

The need for integrating ESG into audit reports may come sooner than we think. While currently not a mandatory evaluation criterion and regulation requirement in internal audits, there has been some talk of ESG etching a more frequent presence in them. A Deloitte report from September 2021 said that auditors can become the catalysts for furthering a company’s ESG goals while identifying potential obstacles.

The International Integrated Reporting Council, however, has factored ESG disclosure into its standards. For instance, in 2007, the Prince’s Accounting for Sustainability Project took into consideration core environmental indicators such as waste, water, energy and carbon emissions.

Sustainable investors, many of whom are millennials, base their investment decisions on such reports. In its report on sustainable investing, the multinational firm EY said that as millennials accumulate wealth, businesses should shift strategies to incorporate the desires of the socially responsible investor. It added that millennial investors are nearly twice as likely to invest in companies or funds that target specific social or environmental outcomes.

Future of ESG in millennial hands

In the US, Morgan Stanley has estimated the country’s 80-million millennials will inherit $30-trillion of wealth over the next several decades from their baby boomer parents and grandparents.

Termed “The Great Wealth Transfer” or “The $30-Trillion Challenge”, millennials are being questioned about what they will do with the incoming wealth. Millennials have a values-driven approach to money and careers. They may very well drive ESG investing in the years to come.

In 2020, investment research firm Morningstar revealed that 95% of millennials are interested in sustainable investment, and 90% want their investments tailored to match their values.

Lebo Madiba is the founder and managing director of reputation management agency PR Powerhouse