The unsung 'G'​ in ESG

Let's face it: the 'E' in Environmental Social and Governance (ESG) standards gets all the limelight. Commitments to mitigate climate risk make a glossy marketing brochure or social media post with stunning photos of our planet. Customers buy more products because it feels good to buy from a company that cares about the planet. And with all the climate action momentum, businesses today can't afford to skip out on the 'E' without risking losing a customer base to competitors. The 'S', on the social implications (both inside and outside the company) of doing business, doesn't fall far behind. Customers don't want to do harm to others and great community-centered initiatives, products, and employee welfare policies help to promote company brands. But what about 'G'? How do you make 'G' noteworthy?

What's the 'G' in ESG

Governance is a key element in corporate strategy and performance because it guides how resources (human and capital), markets and the legal and regulatory environment can be used to meet company objectives. There are lots of ways to define the 'G' and ESG standards and ranking systems all vary by a little bit here and there. Here are some of the standard ingredients for 'G', at least according to risk indices (side note: ESG impact standards, many argue, would be more effective and involve a different set of criteria, but that's another article!). The three main governance ESG risk categories:

• Corporate Governance: board management/quality and integrity, board structure, ownership and shareholder rights, remuneration, audit and financial reporting, and stakeholder governance. This can also include independence and diversity of management and boards and remuneration linked to ESG benchmarks.

• Corruption: bribery and corruption policy and programs, transparency, whistleblower programs including protection, political involvement programs, money laundering and extortion policies.

• Business Ethics: lobbying and political expenses, accounting and taxation, lobbying and public policy, sanctions, intellectual property, anti-competitive practices. This can also include misleading communication (greenwashing), tax evasion and aggressive tax optimization.

Many companies, and their investors, often overlook the 'G' when a company is making really great progress on environmental and social goals, which bumps them up on sustainability index indicators. It's an impressive bandwagon to want to be a part of, as one of Wall Street's hottest investment trends and about $35 trillion in assets.

But those who have been embroiled in scandals know that getting governance right should not be overlooked by flashy 'E' and 'S' company commitments. Governance ensures the company and individual employees abide by the law and also minimizes reputational risks emerging from political scandals, corruption, tax evasion and anti-competitive practices. Mistakes in 'G' are costly to a business. Think about the Siemens corruption case that came with a $1.6 billion price tag.

Let's Add a 'Culture of Integrity' to the 'G'

I know, I know. No one wants to add more to the checklist. But to make sure 'G' is working we need to go from superficial box-ticking to digging deep on one more component: How well does a company advance, measure and promote workplace ethics and integrity? Why, you might ask, is this important to investors and risk management and to 'G'? The short answer: Because you can't make a rule for everything.

An ethical workplace culture minimizes company risks and drives ethical decision-making where there is no clear policy or rule. Many unethical decisions take place in the 'grey' area which is defined by workplace culture and management priorities. It often happens when profit supersedes ethical problem-solving.

There are so many examples where companies have failed because profit has trumped ethical decision-making. Look at the Ford Pinto Case or the VW Emissions Scandal. We don't even have to go that far back in history. Investigations into the Boeing 737 Max crashes in 2018 and 2019 demonstrated that the corporate culture was ultimately at fault. Time and again, Boeing executives and engineers didn’t heed warnings, opted against additional precautions and made decisions for the sake of saving money or raising profits.

Philosopher Emile Durkheim explains that organizational contexts shape our actions. As individuals, we are driven by shared norms and beliefs and values which are defined implicitly and explicitly in the organizations we work for. Psychological and social studies are aplenty. We have Philip Zimbardo's Standford Prison Experiment and another by Stanley Milgram, on authority pressure. If a leader, points to the right and the code of conduct, points to the, left, what would people do? Experiments show, in most cases people are obedient. They follow the authority. Similarly, Solomon Asch, tested what people would do when confronted with peer pressure. When people are surrounded by others, who obviously have different opinions, other views, and other judgments, they begin to doubt their own judgments and side with what their peers say. 

Even good people in an environment with clear rules can make unethical decisions. Context and work place culture matter. It matters for mitigating risky behaviors.

So what does a 'Culture of Integrity' look like in an organization?

It's hard to measure the invisible. Sure we can measure the policies, e.g. is there a whistleblower (and retaliation) policy? But rules are not enough. Do people feel safe to speak openly about issues, practices or decisions that would put the organization at risk? Is information transparent? Can leadership listen and have an open discussion of employee concerns? Can results be put on an equal footing with ethics and integrity? What kind of values are communicated and will be operationalized to ensure we don't cut corners in the name of profit?

There are hundreds of low and high-hanging fruit on how to do this but I will condense it to three primary entry points: enabling environment, organizational and individual.

For the enabling environment, we are looking at laws, policies and rules. We are also examining the external dynamics and pressures of the marketplace, as well as, general accepted business philosophy and measurements of success that are taught by business schools or touted by business leaders. Some of these things are changeable but most are not. However, organizations can take a critical look at values, how the company fits into the broader framework and ecosystem and how it designs its own rules, policies and processes to align with its own values, within the environment where it operates. And it can also take a leading role in changing the enabling environment through collective action initiatives with other companies that advocate for sustainable and corruption-free practices.

At the organizational level, a lot more can be done. The key ingredient is to allow for discussions: speak up and listen up cultures. This can be gently encouraged or institutionalized with regular feedback loops. For example, in the anti-corruption world where I operate, we create these mechanisms to both improve the transparency of information and make sure those affected have a voice in decision-making and operations processes. Accountability mechanisms can be internal where employees give feedback on how leadership and policies affect their work, as well as, provide solutions to challenges. Feedback loops are also an important information source from external stakeholders, customers, investors and suppliers. They can help the organization know if it is meeting expectations and providing services ethically and with respect. Such feedback can be formalized or informal, but encouraging, recognizing and valuing different opinions across the organization is where it begins.

At the individual level, there are also a lot of options. Training employees and leaders on what to do when faced with an ethical dilemma through heuristics and other techniques builds their mental muscles to evaluate and prepare for such situations, as well as, advise junior staff on ethical dilemmas they encounter. Human resources have an important role to play in emphasizing integrity in recruitment and promotion, especially of leadership, through psychometric testing and 360 reviews. Who gets promoted in our organizations, the aggressive but successful person, or the reflective person who looks at decisions from a broader perspective? Do we value humility, integrity and let me add compassion.

Many are concerned that we can't measure culture. It's not true. We can conduct annual surveys to ask people if they feel safe speaking up, if their managers listen to different opinions and elevate ethics, how are mistakes dealt with, etc. We can create heat maps of different departments and hone in when a group is in the 'red'. The positive spin-off effects are many which include more inclusive management and decision-making, safer and more innovative work environments that encourage different viewpoints, employee retention, and, the one that companies may prioritize: better risk management for both finances and reputation.

Conclusion

While the 'G' is harder to see and harder to measure than measuring GHG emissions or counting the number of trees planted, it should not be overlooked. Good governance is a risk mitigation measure and having robust policies in place is not enough. A culture of ethics and integrity will recognize and empower employees who strive for work that is aligned with the law and respect for others. And it will allow concerns to be raised that could be lifesaving. And that is your organization's best bet to mitigate reputational and financial risks.

This article is also published on the author's blog. Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy & Sustainability writers, their opinions do not necessarily represent those of illuminem.