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The Future in Focus

LRQA Podcast: The 'S' in 'ESG'

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6 DECEMBER 2022 09:00 ◦ 26 MINUTES

Often, when we hear the term ‘ESG, or Environmental, Social and Governance issues’, people think first of the environmental component and less so about social and governance.  In this episode, LRQA’s Chief Growth Officer, Ian Spaulding, is joined by special guest Mike Posner to talk about the ‘S’ in ‘ESG’; what it is, how it’s evolved, and why it should be at the top of an organisations agenda.

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LRQA: The Future in Focus

Thanks everybody for joining us so my name is Ian Spaulding, I’m the Chief Growth Officer from LRQA based here in London and I'm delighted to be joined by Mike Posner, a friend and long-term colleague who’s been working in the space of ESG and human rights along with business for many years. But maybe Mike, I might ask you to put you on the spot and introduce yourself in a little bit more detail, both the current role that you have at Sterns, but also maybe introduce our audience to some of the previous hats that you’ve worn in your illustrious career.

Thanks, Ian and it’s great to be with you. So I’m currently and I have been for the last ten years at the NYU Stern School of Business where I’m a professor and teach, but also run a centre on business and human rights. It’s the first human rights centre and a business school anywhere and we work on a range of issues including supply chain labour issues but also issues relating to technology, the investment sector etc. Before coming here I worked for the US Government, I was an Assistant Secretary of State for Democracy, Human Rights and Labour in the Obama administration from 2009 to 2013. And before that, I spent many years running an organisation now called Human Rights First in New York and I also taught law at a couple of law schools, Yale and Columbia. I’ve been working in the business and human rights space for a long time working with you Ian and others and really have seen this field evolve to where it is today, and I think were at a very interesting place, so it’s great to be with you.

Great, thanks Mike and let’s start you talked about your career and a lot of work on business and human rights but the topic we’re going to talk about is the broader topic of ESG or Environment, Social and Governance issues which I think has evolved in that same kind of career history that you’ve had, and I think there’s certainly a lot of work that had gone on in the private sector on the environmental initiatives, certainly you know that goes back many years. I think a lot of people in our audience may not understand the ‘S’ in ESG, so maybe if you don’t mind, maybe we’ll just dig into the ‘S’ which I think you know obviously had experience doing that as it relates to human rights, but if you don’t mind maybe we’ll just start and dig into.

What is the ‘S’ in ESG and tell us your perspective about how businesses are trying to address it.

Well the ‘S’ is social and social can mean many different things, that’s one of the challenges we face today. It certainly includes some elements of diversity and inclusion but also, I would say issues relating to labour practices and the outsourcing of global labour. ESG is a combination of what economists would call externalities, things that are not directly related to business returns and it came out of an effort by the World Economic Forum in 2004 so it’s not an old concept, to basically respond to what is a growing public demand, public concern about climate change, as you say about a number of environmental issues, but also some broader social issues like diversity and like labour practices in supply chains. It’s evolved very quickly and it’s now basically a big factor in our investment economy something like 35 trillion dollars are in what is called ESG funds, but they cover a range of very different issues and go about it in very different ways.

Since you mentioned the 35 trillion in ESG funds, are there funds that specifically focus on the ‘S’ in ESG or is it primarily kind of more of a catch all for the broader topic of ESG?

I’m not aware of any funds that call themselves ‘S’ funds, people seem to have sort of grouped the three things together, the governance issues are things that corporations and lawyers have been dealing with for a long time, it’s not really clear to me why that’s grouped in with the environmental and social. But by and large overwhelmingly the funds call themselves ESG and as you suggest, often they’re much more focused on the environmental side of the equation than on the social side.

And so are companies now at least from your advantage point focused on ESG in general and ‘S’ specifically, and if so why Mike?

Well I would say increasingly yes companies are aware that consumers and investors are paying much greater attention than they were say a decade ago or fifteen years ago, certainly on the climate crisis people, lots of people view that as a kind of existential threat to our wellbeing. But also on the social side people are worried about the exploitation of workers. What we see going on with the world cup in Qatar is a reflection of the fact that lots of people are saying who built those stadiums and what were the conditions that they laboured in. There’s a lot of concern about economic inequality, there’s a concern about diversity, so yes, I would say companies are reacting to both what investors are saying, what consumers are saying, and very importantly to what their own employees are saying. These are issues that matter especially to the next generations that are coming into the workforce, younger workers are paying attention to this, younger investors, and they’re also things that I would say women overwhelming are paying greater attention than men to. So, this is something that’s coming down the pipe, I don’t think companies can ignore these issues for much longer if they’re doing it at all and I think now we have to make it more real and have better data, better ways of evaluating how do you actually perform better on the ‘S’ and the ‘E’.

Now I mean so that’s super helpful Mike but you didn’t mention the government and as a guy who used to work at the government, do you feel like the government is also asking companies to do more to address these ESG issues, and if so maybe elaborate on a couple of areas where either the US government or other governments around the world have said we’re going to regulate you the private sector to manage these ESG issues.

Yes, absolutely there has been I would say there has been in the last five to eight years much greater focus among governments, both in the EU where I’d say the greatest focus is now, but also in the US. So let me take those each separately. The European Union has now this year mandated that every EU government adopt what they call mandatory due diligence laws on environment and human rights on social issues. What that means is that both regulators and the courts are going to play a greater role in evaluating whether or not companies are exercising adequate due diligence with respect to these issues.
The French government were the first to do this in 2017, now a number of western European governments have followed suit and as I say the European Union is mandating that all 27 EU members adopt these mandatory due diligence laws. So that’s one example from Europe. In the United States we have a couple of examples, the Security and Exchange Commission under Gary Gensler’s leadership has now mandated or has proposed rules governing reporting by companies. The first on carbon footprint, which was proposed at the end of last year it’s gotten a lot of attention more comments than anything the SEC has ever proposed. A second on greenwashing which came out in May, and a third on what’s called human capital. So they’re going to be looking I think at the diversity and labour supply chain issues probably early next year. But that’s one form of government saying basically we’re going to demand that companies produce better data and make it available to us the government. Another very specific example again from this year, is a law that was passed by congress overwhelmingly called the Uyghur Forced Labor Prevention Act and it basically says there is a presumption that products coming from the Xinjiang region of China are produced with forced labour and can’t be imported into the United States. And so that means cotton overwhelmingly Chinese cotton comes from Xinjiang, it means solar panels again overwhelmingly the ingots and wafers are produced in Xinjiang province where forced labour is widespread.

So the US government is saying we are now taking measures basically to tell companies these are things you need to be paying attention to and we’re going to mandate that by law.

And so you mentioned in the beginning that just the role of consumers, the role of employees within a company to apply pressure for companies to advance ESG, and then you just mentioned just the sheer number of new regulations that have come into effect in the EU and the US.

I guess the question is, which one is more effective in sparking change and also in driving impact and those are two different things but I’m just curious from your perspective is it a little bit of both or is one a superior route to spur companies more than another and are we going to be happy with the outcome that comes from that particular spurring if you will?

Well whether we’re going to be happy is a question I think that is quite open I’m not sure of the answer to that, but what I will say is I think the government’s role here is as a catalyst, the government are saying both the European governments and the US we’re not satisfied that companies acting alone are going to do what’s needed in a timely manner. So they’re putting pressure on companies to pay more attention to these issues and to come up with better data. That I think is going to inevitably force companies to rethink the way they’re doing it, which I think is a good thing. It’s going to mean though that companies have to take the bull by the horns and have to internally figure out how to do this in a practical way consistent with making a profit and being successful commercially.
What’s lacking here and what I think there’s going to be increasing pressure to do is to have companies pay greater attention for example to their global workforce, get better data, have the industry by industry standards and metrics. Right now that 35 trillion dollars that I described in the investment sector is largely looking at risks to investors not to people and the planet, it’s very loosely defined. And so I think what you’re seeing is that the investors, the big institutional investors have said, boy there are a lot of people who are concerned about environment, they’re concerned about you know human rights and social and labour issues and diversity and equality, let’s just give them something and call it ESG and promise them that we’re going to give them comparable financial returns.
I don’t think that’s possible and I don’t think going forward that’s going to be enough, and so I think what government is doing is actually serving as a catalyst for companies and those around them to say you actually need to measure these things, you actually need to be out in the factories or the farms where you’re producing things, you need to know what’s going on and you need to have reasonable measures so that you can evaluate and others can evaluate what you’re doing. One of the things I’m very keen on is that the companies that are leading in this area whether on the environment or social side ought to be given credit for it, and right now I think there is such a lack of data and a lack of serious measurement that it’s very hard for a company to demonstrate leadership because there’s so much noise in this space. We need to create real incentives for a system to be measurable, to be clear, to be transparent so that those industry leaders can get credit both in the marketplace and from their own employees.

I think it’s super important. I would say your comment about the role of regulation in spurring but also in holding companies accountable is super important especially as we go into a recessionary environment because I would imagine and I’m curious to get your thoughts on this. I would imagine that there’s going to be some difficult choices that companies are making in the UK and the US and Europe as we enter what might be an extended recessionary environment.

Would ESG be put on the back burner in light of the need to focus on profits and cash etc., you know, so I’m curious to get your predictions on whether or not we’re going to see that in the next few years.

Yes, I don’t think there’s any doubt that the focus on issues like environment and social conditions is much easier when you have a robust economy. When the economy tightens, when we go into a recession or an economic downturn everybody is going to be scrambling to figure out where do we cut costs and the easiest place in a way is to go outside of the core business to look at things like their supply chains and labour as a cost.
So I think there’s going to be a lot of pressure now to kind of go into a tighten our belts mode, but it’s not going to last forever and I think the broader trend to me is government pressure is not going to decrease it’s going to increase. There’s going to be more focus again on differentiating those that are paying greater attention to these issues and those that are trying to shirk their responsibility, and that’s going to mean that there’s, companies that are going to do better in my judgement are those that right now are thinking about how do we put systems in place so that we actually know what’s going on in our business realm, in our business model. How do we be sure that we’re prepared as these issues become the subject of greater government regulation, greater consumer pressure, and greater company employee pressure so that we’re ahead of the curve as we start to come out of a recessionary period. I think for the next few years for sure there’s going to be belt-tightening, but the broader trend to me is that these issues are not going away, they’re going to be a bigger part of the economy in five, ten years from now than they are today and the companies that succeed are those that are going to be doing the work now to put themselves in place to be leaders.

You also mentioned a few minutes ago about leaders, companies that have taken a leadership role and advancing ESG not necessarily getting the credit that they deserve. Where is that coming from, is that really at the feet of media or have companies gone out to you know too much, too further in terms of where their actual impact is and consumers and activists are challenging the impact that they’ve achieved. What do you think is the root cause for why we still live in this name and shame, even among the leadership companies that exists today?

So I think there are two factors at least that are contributing to that. One is that you have on the advocacy side, the human rights groups and others, the social activists a tendency or a propensity for doing the naming and the shaming, we will expose violations, we will write a report, it will get media attention and the media feeds into that, that’s sort of the MO of even the mainstream media it’s always looking for a good story. And it’s sort of like shooting fish in a barrel, let’s go look for some place in the world where something bad is happening and attach the name of a big global brand to that and we will you know write a big story or do a show, a TV show or whatever and get good ratings for that. So one element of it is the media, social activist you know playbook which has been there for a long time and if anything is extenuated by social media, it’s now so much easier to get somebody with a video attached to their phone to upload something and all of a sudden, you’re off and running on that expose and the name and shame. That’s one aspect of this and I think the other aspect is that too many companies have spent more money on public relations and advertising than they have in actually trying to improve the way they produce things and so there is a scepticism on the part of the public, a big part of the public about what is now called greenwashing or blue washing or sports washing, lots of names for it. But there’s so many companies that are advertising the fact that they’re leaders, they’re doing great on environment, they care about their people, they’re doing all kinds of things to promote diversity and there’s a scepticism because it’s really hard to measure those things. And so I think the combination of those things to me desperately calls out for a better system where companies are actually seriously evaluating what they’re doing, there are industry standards and metrics, there is a means of evaluating performance that’s credible and there is accountability and at the end of the day some companies are going to come out looking better and some worse. Those that are doing better in fact ought to be getting the credit for that and as you know I chair something called the Fair Labour Association, we’ve been around 20 years and a number of good companies have been part of that effort, it’s not perfect, but we put them through the paces. They do an evaluation, we do an evaluation of them every three years and one of my frustrations is the companies that are actually doing the hard work of getting accredited by the Fair Labour Association don’t get a lot of credit for that. And so I think, and whether or not, that’s not the only example but it’s one, we need to find ways to basically improve the gathering of data, the evaluation of performance and frankly companies like yours Ian can be part of that solution, you’re doing a serious kind of social auditing. Companies need to take advantage of that or use that kind of a service would elevate us and others to basically improve their own evaluation of their own performance and then be ready to go out and let others come in and confirm that they’re doing the right thing. I think we can get there, this is not rocket science, but it requires companies to get their own house in order, to have outsiders come in and evaluate and then be ready to reap the rewards if in fact they’re doing the right thing they ought to get credit for it as I said with their own employees, with consumers and with investors.

That’s super helpful Mike. Maybe my final questions really you know the folks who listen to this podcast tend to be folks that are driving sustainability or ESG within their companies and they may be risk officers or head of quality you know or food safety etc. What advice do you have for them over the course of the next three to five years as we think about the increase in regulation, the new requirements and also the challenge in this economic environment to achieve big things with limited budgets, where would you encourage them to focus or prioritise?

Well, I think the people you’re talking about within companies, their biggest challenge is to marshal the facts and make the case at the c-suite these things, companies don’t make big commitments in these issues if the corporate leadership at the top aren’t willing to do so and there’s all kinds of competing pressures as we’ve talked about. The pressures of a tightening economy, the pressures by people and the operations or the sourcing side of the house, trying to figure out how to get the most for the you know, as quickly as possible at the lowest cost. And so I think for people in companies that are on the ESG or sustainability side, CSR, whatever it’s called, I think it’s really important to be making a good case to management to the c-suite executives that what I’m saying is in fact predicting a future where these issues are not going away. There’s going to be more scrutiny, greater demand by government, by consumers, by the companies employees to actually dig in and figure out where, how is the business running, what are the risks you face and how do you reduce those risks by getting on top of what’s going on. It means monitoring what’s happening, it means training, there are a range of things that can be done, but I think for people in this audience it’s really putting together the case for why this is smart business, it’s in the long term going to make the companies that you’re working for more effective, more competitive, more sustainable in a meaningful way.

Great, thank you Mike. I appreciate your advice and I’m glad you’re doing what you’re doing Mike and educating the future business leaders of America but also the broader investment community, business community about ESG and the need for us to up our game and do it better, so it’s important work and I just encourage you to keep doing it.

I promise I will and you keep doing what you’re doing. Thanks for having me.