As part of our work, we are often challenged to explain how business tools, including ESG performance measurement, relate to being purpose-led. In July 2020 we published a working paper to encourage debate and conversation, followed by a roundtable discussion in the autumn bringing together people from within large businesses, consultants, and investors to share their experiences and perspectives. This set of four guiding ideas is the result of that and we want to thank everyone who contributed to the discussion.
The rise in prominence of ESG in recent years has compelled companies to look differently at risk and to think hard about the potential environmental and societal harms associated with their business activities. There is increasingly compelling evidence on the alignment of long-term performance with higher ESG ratings, so many companies are now focused on measures to address ESG risks and improve their standing in external assessments. ESG requirements focus on measurable outcomes, as a way for investors to screen their investments, and businesses to challenge themselves against external benchmarks. There has also been an increase in the number of companies seeking to be purpose-led and we are often asked what the relationship is between being purpose led and ESG.
- A common challenge for company leaders embracing a purpose-led approach is how to execute and integrate the high level commitments that purpose directs, connecting the purpose to a strategy that optimises the opportunity to make a positive social and environmental impact together with sustainable financial returns. Focussing on meeting external ESG requirements can help hugely both to uncover hidden risk and opportunity. As such it is a welcome spur to action from the “outside-in”. But focusing only on ESG cannot in and of itself substitute for having a clear purpose – a clear understanding of what the organisation can do and chooses to do about both what they care about and are positioned to do to contribute to a better society. Furthermore, ESG requirements from different sources are emergent, disjointed and still largely focussed on compliance, risk mitigation and reputation management.
- What matters is not so much what language is used. Rather what is key is the quality of dialogue in the leadership team and the mindset both about the “why”, and about what specific outcomes the company should be seeking to achieve in service of its purpose, as distinct from what emerging reporting standards need to be met.
- Meeting the external challenge of ESG considerations focusses on the first vital steps of mitigating risk and avoiding harm. Rapidly developing reporting requirements on net zero commitments and other nonfinancial factors can hugely help to focus minds as well as communicate real commitments and action taken. Building on these, a purpose led business will go still further. Blueprint’s Principles, and the thinking behind them, focus on the quality of relationships and the impact the business has on the lives of all those people touched by its activities. It offers a rationale for a business to examine how to characterise in human terms all the material “E and S” relationships it needs to create and sustain, to engage in continuing dialogue, and to place due value on what cannot be measured in those relationships, recognising the value created for society goes beyond what can be controlled and measured. It shapes, too, the role that a company can have, for instance, in influencing the regulatory environment in a way that serves the common good of society rather than protecting self-interest.
- The governance of a purpose-led business and indeed all its relationships will be fundamentally shaped by the mindset about purpose and people. When well-executed, being purpose-led means a company strives for excellence across all aspects of E, S and G, and does so from the inside-out – moving far beyond a compliance-led ESG approach to seek to benefit society as its core goal, inviting dialogue and scrutiny, and helping to shape as well as to respond to the evolving landscape of assessing corporate performance.
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Original source: Blueprint