Harvard University

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By Zeng Han Jun

Through market dynamism and awareness, some companies have already restructured their business operations with the aim to align with Environmental, Social and Governance (ESG) values. Other than that, some are doing it because they are concerned about their business sustainability in the next 5 to 10 years. 

Then again, I must acknowledge that charting a new direction can be very challenging to some and not all companies can stomach it. That is because true transformation goes beyond reporting and involves securing buy-ins, setting aside time, allocating sufficient resources, exerting strategic effort and importantly, instilling the discipline to stay on course and not drift. One cannot simply believe and hope for the best. 

By discipline, I mean to foster a system that is motivated to sustain itself, keeps itself in check and continually driven to value-add. That is why companies have to ensure that proper governance is in place to ensure that ESG policies, processes and procedures are continually updated at the strategic level and implemented at the operational level. It is easy to say this but difficult to achieve. 

First, strategy must be sufficiently rooted to the larger ecosystem in order for the ideas to be practical, yet it should not be overly-burdened with operations such that no real changes can take place. 

Second, operations are fundamentally the manifestation of policies. It involves processes and procedures that comprise multiple classes of assets, systems at different stages of growth and people with varying levels of training. Ideally, operations should be designed to be nimble and flexible enough to adapt to changes. In reality, action plans can deviate a fair bit from the plans and not easy to change once implemented. 

Clearly, there is a gap between the two domains and the challenge is to ensure that sufficient and fairly accurate insights flow seamlessly between the two domains, in order to facilitate  informed decisions and timely actions. 

You might already know that ESG is quite different from other traditional corporate functions like finance, technology, human resource, etc. Most traditional corporate functions can be organised under a single department. For example, the recruiting function will most definitely be a subset of the Human Resource (HR) department and not under any other departments.

ESG is a little bit different. It is pretty strategic in that its principals influence policies that impact the processes and procedures of other traditional corporate functions. It is not wrong to say that the ESG function has a stake in almost every other corporate function. 

It changes the way a company does its recruiting, investing, auditing, procuring, marketing, administrating, engineering, managing, etc.  On top of this, encouragement by international organisations, governments and exchanges seem to suggest that it is going to be very important in the future. It is important to be aware of these developments because it will affect organisational development. 

Recently, I also discovered that there are broadly five ways companies go about implementing ESG policies internally. 

First scenario – Company ensures that all work processes eventually go through the ESG office for endorsement. 

Second scenario – The ESG office supports every other function in the company. 

Third scenario – Company outsources the work to an external vendor. 

Fourth scenario – Every department will have an ESG champion to ensure ESG policies are implemented within the department. Depending on the seniority of the chosen ESG champions, they could be a part of the executive committee or part of a working level group. 

Fifth scenario – a hybrid of two or more of the above scenarios. 

Personally, I feel that the first scenario signals the strongest commitment to ESG values. If the board is really committed to business sustainability, they must ensure that their staff are sufficiently empowered to perform their duties, otherwise their legitimacy could be undermined by other departments that have more political clout. Without sufficient support, business focus will start to drift away from ESG values. The negative effects could also extend to staff retention and become an impediment to attracting the right talent.  

Attracting the right talent for ESG work is very tricky. The ESG umbrella concerns itself with many topics. It can include science, finance, engineering, research, politics, human rights, fair work practices, equal hiring opportunities and the list goes on. Putting out a job description for an ESG specialist and expecting the staff to handle such a wide range of domains, is fundamentally against the principles of ESG.   

Also, drifting could happen if companies do not have the right talents. They are the ones who are overseeing the governance of the ESG policies, processes and procedures. Apart from staff having useful attributes like qualifications, skills and experiences, most ESG standards additionally recommend for companies to include diversity and inclusivity as part of hiring practices and board composition. 

Companies can show commitment by kickstarting diversity hiring with the ESG office. In fact, many companies are already doing it. Workforce diversity is not a new topic. Numerous studies on the aging population, the trade economy, advanced technology and how these will impact the future of work started very long ago. Workforce diversity was then suggested as one of the many tools to improve productivity, reduce blindspots and gain competitive edge.  

Over the decades, the diversity concept has expanded to include BIPOC and extended to people of other sexual orientations too. Other companies are going further, venturing into the return-to-work concept and helping individuals who have been away from corporate life, to return to the workforce. In a good way, diversity promotes new perspectives and reduces blindspots during discussions, sparks new insights and solutions that could be essential to companies’ long-term survivability (Kirchmeyer & Mclellan, 2009). 

What are blind spots?

Blind spots are mental habits that our brains use to process information quickly and studies have shown that people with the same background tend to think alike/ have the same types of blind spots.   This is why removing these blind spots is extremely important for effective strategic decision making and governance of ESG policies. 

Policies, processes and procedures can change over time, depending on the environment and to a certain extent, the people who are overseeing and managing it. That is why, in addition to ESG policies, processes and procedures, companies also need to have the diversity to keep itself in check, oversee the execution, monitor variances and see if there is a need to tweak the policies. If that is not possible, at least have a mechanism to allow a diverse group of people to review the policies periodically. 

Honestly, diversity might cause some people to be uncomfortable. Issues that were once considered taboo, are now being discussed frankly. People of different backgrounds, who seldom interact much in daily lives, are interacting much more in a diversified work environment. Then again, differences in perspectives supported by open-minded communication, really can help teams to overcome blind spots and are integral to developing a risk-aware approach to business decisions.

Commitment to ESG values without proper strategy can result in a lot of inefficiencies and miscommunication with departments. It is expensive and becomes increasingly difficult to rectify when informal work processes entrench in traditional work functions. The complexity of reengineering multiplies manifold when exchanges start to regulate ESG reporting. 

The key is to first create a proper governance structure that is supported by the right talents. It may not be perfect the first time but we can always improve on the system along the way. 

Maybe there will be an increase in operational cost due to more hiring or increased workload due to extra duties imposed on staff. Can we benchmark the increased operational cost to the long-term benefits/ returns? Maybe the cost/ benefit ratio does work out? Can we streamline the outdated work processes and explore redesigning existing staff work. Maybe there are opportunities to improve efficiencies within pockets in the organisation? 

Apart from these options, companies can also consider organising periodic focus groups for a diverse audience and use the findings to refine their ESG corporate roadmap. Or appoint independent directors to shake things up a little bit? 

Anyway, many companies are just beginning to jump on the bandwagon and are still trying to figure things out along the way too.

The question is; how are you going to do it?

References

Kirchmeyer, C., & Mclellan, J. (2009). Capitalizing on Ethnic Diversity: An Approach to Managing the Diverse Workgroups of the 1990s. Canadian Journal of Administrative Sciences / Revue Canadienne Des Sciences De L’Administration, 8(2), 72-79. doi:10.1111/j.1936-4490.1991.tb00546.x

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