ESG: who really cares?

Jerwin Tholen, Partner, ESG Advisory, KPMG in the Netherlands

This famous quote (by Warren Buffett – one of the world’s most successful people in business) was written in 2014. Ten years later, thanks to our hyper-connected digital world, the words could not be more true. Social media has changed the game beyond recognition. Information about an organization – be it fact, belief or just plain lies – can travel and multiply in the blink of an eye. A good corporate name, carefully nurtured over decades, is one of an organization’s most valuable assets. Yet it can be damaged, turned toxic – or even destroyed – in a matter of seconds.

As our unforgiving era of ‘cancel culture’ continues to unfold, environmental, social and governance (ESG) presents one of the riskiest reputational arenas for companies today. The deceptively simple umbrella term of ‘ESG’ encompasses dozens of topics where the effects of businesses on people and the planet are under ever increasing scrutiny: from environmental impacts such as carbon emissions and habitat destruction, to social impacts such as child labor, diversity and working conditions, to governance impacts including fair taxation.

In all of these areas and many others, society continues to raise the bar on what is and is not acceptable from companies. As expectations rise, so do the risks for companies that make a misstep. A single mistake can trigger not only a global tsunami of condemnation for a brand or business, but also an exodus of customers that hurts the bottom line. Poor ESG performance puts companies at risk of costly legal action and bad publicity.

For example, on the day I wrote this article, news broke that one of the world’s largest agricultural traders is being sued in the US for allegedly failing to prevent deforestation and human rights abuse in its supply chain. Also in the US, oil companies are fighting a growing tide of lawsuits over their alleged attempts to cover up the damage burning fossil fuels causes to the earth’s climate. Here in the Netherlands, we are seeing a growing number of private legal actions against businesses, including airports and airlines, over their carbon emissions.

Twenty years ago, the risks for businesses were much lower because ESG issues had not yet entered the public consciousness. A limited media landscape meant a limited flow of information. Fewer people cared about companies’ ESG impacts, in part because fewer people knew about them. Today, in a world where some 500 million tweets are sent every day, there is no way of stopping information once it is out there. And the more people who know, the more people who care.

Who really cares about ESG these days? In my view, almost everyone does – at least to some extent. Your consumers care. Your business customers care. Your investors and your banks care. Your employees care. And the regulators care. People don’t want to buy from brands and companies that do the wrong thing. Or invest in them. Or lend to them. Or work for them. And they have their own reputations to protect.

So, what do you need to do about it? First, realize that your organization’s reputation does not have a life of its own; it exists only in the minds of the people who care about you in one way or another. Then educate yourself. Find out who cares about your organization’s ESG performance. Talk to them. Understand why they care, what they believe, and what they think. What do they expect from you? And how can the success of your business be affected by what these people think and do?

That’s what we in the ESG world call ‘stakeholder analysis and engagement’. It’s not new, but – because bad news travels so fast these days – deep and sophisticated stakeholder analysis is essential to enhancing and protecting a company’s reputation. It is one of the non-negotiable foundations of an effective ESG strategy, and what’s more, it is now a legal requirement for many businesses under the European Corporate Sustainability Reporting Directive.

Let’s return to the famous quote with which I opened this article: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

That second sentence is critical. Have you thought about how fragile your corporate reputation is and how poor ESG performance can ruin it? If not, my advice is to start thinking about it now. If you have thought about this, then what are you doing differently as a result? And do you need to take a new approach when it comes to understanding your stakeholders?

Improve your understanding of your company’s ESG strengths and weaknesses by taking KPMG’s ESG Health Check.