Effective ESG: Purpose, stewardship and employee buy in

Co-authored by Daniel Popovski (Senior Policy and Advocacy Advisor Governance Institute of Australia), Dr Tracey Dodd (Adjunct Associate Professor (Governance), Governance Institute of Australia and Director Research Development, Adelaide Business School, The University of Adelaide) and Nicholas Alex Gerald Marzohl (PhD candidate, Adelaide Business School, The University of Adelaide).

The necessity of employee buy in throughout the development and implementation of ESG frameworks.

The appropriate objective function of companies has been a contested topic for several decades, stemmed from growing discontent of Milton Friedmans’ broadly endorsed, now outdated, concept of the profit maximisation model.[1] Today, companies are no longer considered standalone entities driven by a profit incentive, but rather as an integral part of society and economies that have far-reaching impacts on people and environments. ESG follows a history of development towards socially and environmentally conscious business models, with origins in socially responsible investing (SRI) in the 1970s and Corporate Social Responsibility (CSR) in 2000s.[2] The visibility, efficacy and success of ESG approaches and communication of such successes has become fundamental to an organisation’s social licence to operate.

ESG is a risk-based framework that aims to identify and reduce social and environmental risks and harms to deliver the organisation’s purpose. The effective delivery of the organisation’s purpose requires genuine participation and engagement of employees in critically identifying, mitigating and managing risks. Studies have shown that employees who work towards a clear organisational purpose that align with their personal values are more likely to be satisfied and engaged with their roles.[3] This drives employee retention, performance and productivity but also has the benefit of retaining consumer loyalty as well as attracting new customers and investors. The communication of sustainability goals can assist in demonstrating that the organisation is prioritising environmental and social responsibility through a long-term vision and commitment to stakeholders, as well as an ability to manage risks.

A clear and meaningful purpose statement is one of the most powerful tools in bringing ESG vision to light. Stewardship defined in this context is the willingness to act to benefit others, subjugating personal or profit-driven interests to act to benefit others long-term well-being.[4] Purpose and stewardship can act harmoniously to help organisations deliver on their ESG frameworks. By building a centralised strategy and decentralising its implementation and ownership through effective employee buy in.

Critically ESG, is no longer just a normative ethical claim that businesses have to be good citizens. There have been rulings that say, under the Corporations Act, you have a legal obligation to think about the impact of your business, on the community and in the long run.[5] Having a clear understanding of organisational purpose will intrinsically guide decision-making, risk appetite and prioritisation.[6] The buy-in from employees to the organisation’s ESG strategy is critical in this regard.

Purpose statements that are solely focused on the business may well result in employees being stewards of the business yet may limit stewardship to the organisational context.[7] Yet, if the purpose statement has a broader impact, vision or mission associated with it, it may enable and facilitates greater action from all employees, directed outside the organisational context and to the wider community, society and natural environment.[8] Through their active engagement, employees become stewards for positive change and sustainable growth.[9] By decentralising sustainability across the business, employees feel empowered to drive initiatives and change that meet the organisation’s sustainability ambitions. Employees that learn about the organisation’s sustainability and ESG ambitions from investor meetings or annual reports drive distrust. This lack of transparency and buy-in from employees can be counterintuitive to meeting the intended vision of the organisation and it is critical that all parts of the organisation embed a sustainability mindset to drive change.

Critically, ESG is not about ‘window dressing’ for investors. Not only does this impact employee trust and retention it can lead to significant financial, reputational and legal consequences.[10] Misleading and deceptive conduct of sustainability activities, particularly greenwashing is a key focus area of compliance for ASIC and the ACCC, as shown by recent compliance and enforcement activities.[11] Earlier this year, the Federal Court found Vanguard Investments Australia contravened the law by making misleading claims about certain ESG exclusionary screens applied to investments in a Vanguard index fund.[12] Australia is now the second most litigious environment for climate litigation with a sub-set of these cases relating to ESG concerns.[13]

Greenwashing a useful lesson on environmental claims, compliance and the need to communicate with precision and purpose.

In April 2024, the ACCC instituted proceedings in the Federal Court against Clorox Australia Pty Ltd, the manufacturer of GLAD-branded kitchen and garbage bags, for alleged false and misleading representation.[14] In its statement the ACCC alleged that Clorox represented that GLAD Kitchen Tidy Bags and Garbage bags were “comprised of 50 per cent recycled ocean plastic collected from an ocean or sea” when that was not the case. In fact, Clorox had collected plastic from communities in Indonesia up to 50 kilometres from the shoreline, and not from the ocean or sea itself.[15]

What is interesting is that the ACCC included in its statement that the use of the statement ‘ocean plastic’ together with ‘blue coloured wavy imagery’ on its packaging and ‘blue-coloured bags’, had created the impression that GLAD bags were made from plastic waste collected from the ocean and in doing so had “deprived consumers the opportunity to make informed purchasing decisions” and also “may have put other businesses making genuine environmental claims at an unfair disadvantage”.[16]

The packaging itself disclosed that the bags were made from ‘ocean-bound’ plastic and that Clorox was acting to reduce plastic pollution before it enters the ocean, helping to reduce pollution in waterways and saving marine life. The advertising disclaimer had also clarified that the product was ‘made using 50% ocean bound plastic that is collected from communities with no formal waste management system within 50km of the shoreline’.[17] However the text and positioning of these statements were discreetly sized and placed on the packaging, preventing consumers from making fully informed decisions.

The primary arguments presented by the ACCC underly the need to communicate with precision and purpose. A lack of integrity of company values and purpose through apparent deception of consumers and stakeholders in marketing and packaging material can drive severe consequences. Effective ESG frameworks critically identify risks in meeting environmental and social goals and where any such goals may be miscommunicated or misrepresented. Precision marketing and statements of claims must be appropriately backed by evidence. For directors of companies this means effective governance processes that ensure that due diligence and a duty of care has been demonstrated to verify, test and ensure statements made are clear, precise and backed by independent advice. The repercussion for not doing so can significantly deteriorate trust and confidence in the company’s operations impacting consumer sentiment, employee retention and investor interest.

How to deal with the ESG backlash: Global SDG goals are off-track requiring greater action and commitment by local companies and industries

UN secretary general Antonio Guterres sounded the alarm on a recent assessment report of how the world is tracking towards the 2030 Sustainable Development Goals (SDG), with progress on more than 50 per cent of the SDG as weak and insufficient. More than 30 per cent of the SDGs were found to have stalled or gone into reverse, with only 15 per cent of SDGs on track to meet their targets by 2023.[18] Achieving SDG is critical to achieving and maintaining a stable society, clean environment and maintaining a stable society and climate. Failing to achieve SDG goals has far reaching consequences for organisations in the future. Companies can play a powerful role through effective ESG frameworks in delivering broader SDG.[19]

Evidence from the United States shows a growing tide of ESG backlash with shifting sentiments and regulations. Several leading US financial institutions withdrew from Climate Action 100+, an international coalition of money managers pushing large companies to address climate issues.[20] The political polarisation in the United States is driving some Republican-governed states to blacklist money managers with sustainability commitments and have introduced legislation aimed at limiting the ability of financial institutions to include ESG considerations in investment strategies.[21] This extends to major banks no longer pursuing commitments to stop financing new coal mines, ceasing to publish the exact energy mix included in investment portfolios. This may have destabilising impacts to global decarbonisation efforts. Yet, investment into industries that are no longer aligned with social and environmental values risk the stewardship model of sustainable business practices, posing a significant threat to ESG practices globally.

The World Economic Forum (WEF) recognition of the ‘anti-woke’ backlash globally means local industries and businesses should act to double-down on concrete ESG commitments and action. A survey by BCG and INSEAD of corporate directors suggest that sustainability is still not fully integrated into board selection criteria and that this was having an impact on the purpose, vision and mission of organisations.[22] WEF contends that greater simplicity in ESG regulation will go a long way to reassuring the doubters on the board, as they describe new legislation and standards set by governments and international bodies as acting to strictly enforce rules on businesses resulting in a counter-productive decision-making in board rooms.[23] It is not necessary that corporate boards have deep skill and knowledge of sustainability related issues but they must be skilled at risk and strategy to thoughtfully seek expert information about their organisation’s sustainability journey. Heidrick’s research suggests that ESG-savvy boards are becoming more common, with a greater understanding of ESG issues at the board level helping to engrain a sense of personal responsibility and duty among corporate leaders. Some studies suggest that board diversity targets can drive ESG outcomes.[24]

Fundamentally, it is about board and employee stewardship of organisations. By acknowledging that organisations have a perpetual lifespan beyond the tenure of any CEO, board director or employee, the long-term visionary planning of organisations is critical to steer the focus back to holistic long-term sustainability goals.

[1] https://scholar.harvard.edu/files/hart/files/108.00000022-hart-vol2no2-jlfa-0022_002.pdf

[2] Ibid

[3] https://www.mckinsey.com/capabilities/people-and-organizational-performance/our-insights/help-your-employees-find-purpose-or-watch-them-leave; https://www.gartner.com/en/articles/employees-seek-personal-value-and-purpose-at-work-be-prepared-to-deliver

[4] Hernandez, M. (2012). Toward an understanding of the psychology of stewardship. Academy of management review, 37(2), 172–193

[5] https://guthrie-legal.com/blog/esg-2024

[6] George, G., Haas, M. R., McGahan, A. M., Schillebeeckx, S. J., & Tracey, P. (2023). Purpose in the for–profit firm: A review and framework for management research. Journal of management, 49(6), 1841–1869.

[7] Caldwell, C., Hayes, L. A., Bernal, P., & Karri, R. (2008). Ethical stewardship–implications for leadership and trust. Journal of business ethics, 78, 153-164.

[8] Campopiano, G., De Massis, A., & Chirico, F. (2014). Firm philanthropy in small–and medium–sized family firms: The effects of family involvement in ownership and management. Family Business Review, 27(3), 244–258; Balakrishnan, J., Malhotra, A., & Falkenberg, L. (2017). Multi–level corporate responsibility: A comparison of Gandhi’s trusteeship with stakeholder and stewardship frameworks. Journal of Business Ethics, 141, 133–150; Aguilera, R. V., Rupp, D. E., Williams, C. A., & Ganapathi, J. (2007). Putting the S back in corporate social responsibility: A multilevel theory of social change in organizations. Academy of Management Review, 32(3), 836–863.

[9] https://www.linkedin.com/pulse/driving-change-from-within-crucial-role-employees-enforcing-dayal#:~:text=By%20assuming%20roles%20as%20champions,company%20and%20society%20at%20large.

[10] Jaén, M. H., Reficco, E., & Berger, G. (2021). Does integrity matter in BOP ventures? The role of responsible leadership in inclusive supply chains. Journal of Business Ethics, 173, 467–488.

[11] 24-061MR ASIC wins first greenwashing civil penalty action against Vanguard | ASIC

[12] 24-061MR ASIC wins first greenwashing civil penalty action against Vanguard | ASIC

[13] Australian and Pacific Climate Change Litigation (unimelb.edu.au)

[14] GLAD bags manufacturer in court for ‘50% ocean plastic’ claims | ACCC

[15] GLAD bags manufacturer in court for ‘50% ocean plastic’ claims | ACCC

[16] https://www.accc.gov.au/media-release/glad-bags-manufacturer-in-court-for-50-ocean-plastic-claims

[17] https://www.accc.gov.au/media-release/glad-bags-manufacturer-in-court-for-50-ocean-plastic-claims

[18] UN sustainability train is dangerously off track – Geneva Solutions

[19] The SDGs Explained for Business | UN Global Compact

[20] https://www.lexology.com/library/detail.aspx?g=5ba57eb9-54b8-4ade-bead-3350f7ce5b10

[21] https://www.lexology.com/library/detail.aspx?g=5ba57eb9-54b8-4ade-bead-3350f7ce5b10

[22] https://www.bcg.com/press/10july2023-knowledge-gaps-sustainability