From ESG to competitive sustainability

“We will not pledge and disclose our way to a sustainable future – more is required of us.”[1]

In recent years we have seen a plethora of reporting regulations and voluntary initiatives in the corporate sustainability space. I have been somewhat puzzled by the apparent reliance on this approach as a key lever in the transition toolbox, as it appears to be a somewhat patchy and indirect way to drive the wholesale change needed to tackle climate change and nature depletion. Having targets and measuring impacts and progress are, of course, necessary; but I have often wondered whether there has been too much emphasis on the reporting and not enough on the doing.

My quandary has been highlighted in a paper “Survival of the Fittest: From ESG to Competitive Sustainability” from the Cambridge Institute for Sustainability Leadership. The paper argues that, despite decades of corporate efforts and successes such as the large-scale financing and deployment of renewable technologies, from the planet’s perspective business is failing to change at the speed required. Put simply, the ESG project has failed. Moreover, “business will not thrive on a planet suffering cascading crises and gripped by unmanageable risks.” The paper’s tone is urgent, arguing that it is in the interest of business (other than those organisations with very short-term horizons) to push for policy which fundamentally reshapes the markets to deliver transition and to focus on being competitive from a sustainability perspective to succeed in those markets.

More specifically, the paper points out that the ESG approach was predicated on the notion that environmental and social disclosure, reporting and governance with corporate targets could propel market transition. While this has achieved some limited change, the fundamental problem is that in most instances it is still more financially beneficial in the short term to operate in unsustainable ways. The paper also puts forward the unpalatable observation that corporate ESG activities may have hindered progress in that they give a false reassurance that everything is going in the right direction, thus masking the need for radical change.

Like many other commentators the authors of the paper call for strong government policy action. However, they see the alternatives as either government policy which shapes the market to allow the market to deliver that change, or, if action is not taken quickly enough and the transition arrives by way of catastrophe or crisis, the likelihood of centralised economic control. They maintain that markets, if given the right policy landscape, can and are the right place to deliver the necessary change as demonstrated by the innovation and success in delivering renewables. That said, government policy needs to tackle the conflict between the short-term profit motive and sustainability goals. Environmental and social impacts need to feed into financial performance, with appropriate incentives and penalties. Moreover, there is a critical role for business leaders in achieving the policy change.

The paper argues for a change in “mindset” and the “market.” There needs to be a move away from sustainability as an ideology or philosophy of being a good corporate citizen and from the consequent focus on reputational measures. The authors argue that this is not a solid foundation for achieving transition: recent years have shown that market attitudes can change and there can be a divergence between a business’s reputation and impacts. Furthermore, while the activities of individual companies are still relevant, business needs to shift its perspective from just individual performance to focussing on how the economy needs to change as a whole to deliver transition and avoid the most hazardous outcomes.

The paper stresses that to get the required policy changes to reform markets for transition, policymakers will need strong voices in the private sector calling for and backing this. Those seeking change must be as vigorous in calling for this as those who have historically taken a short-term approach and sought to maintain the status quo. Additionally, business needs to deploy its marketing skills to sell the benefits of sustainability and to challenge political narratives positioning transition as an unnecessary and often costly change to be forced upon the public.

The authors call for businesses to use their resources to shape the fundamental market change required to deliver a “managed transition” with a “soft landing”. They advocate that “The leadership agenda for business must therefore now be focused on strong action to urgently accelerate systemic, economy-wide change – and to prepare their businesses for that change.”

[1] Hooper, Lindsay; Gilding, Paul (2024). Survival of the Fittest: From ESG to Competitive Sustainability. Cambridge, UK: Cambridge Institute for Sustainability Leadership

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© Farrer & Co LLP, November 2024