Posted 25th July 2016
This is a guest blog from Vincent Neate, Head of Sustainability Services at KPMG UK. Vincent has over 20 years of experience at KPMG, where he has been at the forefront of creating relationships and practices based on sustainable value creation. Vincent has recently joined the Social Value UK Board.
The business world, we all know, is excessively enamoured with acronyms and abbreviations. Few of us will not have sat in a meeting with some clever-clogs pointing out that we have miscalled an abbreviation an acronym. Whilst we take the mickey out of ourselves and each other for this, these short hands serve useful purposes. They speed things up. They make things memorable. They trip off the tongue.
Early in my career with KPMG I spent some very happy years in Research and Development. Here we would spend hours coming up with acronyms beginning with K which were funny enough to amuse our colleagues but subtle enough to pass partner censorship. So, acronyms can be fun too.
But, the thing is, words have meanings that we cannot necessarily control. The introduction to the general lexicon may take them beyond the original abbreviation or acronym’s intent. What started as a great idea because it tripped off the tongue might even become so ubiquitous that it starts to shape the cultural and strategic agenda.
I don’t know when ESG was first used in the world of sustainable and responsible investment and I must confess that I have not really tried to find out either. Over the years I have heard it spelled out in many different ways but we all know that it is shorthand for three words – Environmental, Social and Governance. It is certainly ubiquitous, companies and investment managers have ESG policies and procedures and The Private Equity industry have ESG Due Diligence questionnaires. There are untold roles in organisations where ESG is either in the job title or job description.
My itch about “ESG” started around 2005 when I was on the Professional Standards Committee of Invest Europe (then called EVCA) and facilitated the first face to face roundtable between the PE initiative of the UN Principles of Responsible Investment and a number of the largest global buy-out firms held in New York. Things have changed beyond recognition in the intervening years but my humorous take on PE and ESG at the time was that the managers were happy to deal with ‘E’ and ‘G’ but less so ‘S’. They were happy to deal with ‘E’ because it had calculable cost benefits. They were happy with ‘G’ because the whole industry is predicated on aligning management and investor interests. The problem was that to get them to embrace ESG we would have to help them understand that ‘S’ meant more than just workers’ councils and handing power to trade unions.
I thought I was funny.
I think this example illustrates two very important points. The first is that the three components of ESG are not, from the perspective of business and management decision making, equivalent. The second illustrated point is that our abbreviations don’t just speed up our communication and occasionally supply mild amusement, they positively direct and drive our behaviour.
I think this example illustrates two very important points. The first is that the three components of ESG are not, from the perspective of business and management decision making, equivalent. They are not of equivalent scope, scale, or even importance. Governance is huge, it is a meta-process which sits above all operational processes and is the thing that determines the parameters and content of conversation at the Board. Bad governance is a Board deprived of relevant information; failing to properly discuss information or ignoring information. That information can be anything – financial, risk, market, regulatory, social or environmental.
Environmental is different. It is precise and increasingly indisputable. If you use energy you have a carbon footprint. If you fell a tree the tree is no longer there. So many parts per million of fluoride in the water supply is harmful. Environmental can be easily regulated and is. If it were not for the gradualism of the political process and the lobbying of industry (and I concede wider economic concerns) we could control our environmental impact today.
Social is messy. What exactly is the relationship between business and society? Is it different if the business is large or small? What should we think when the business is resident in our community and sells in our community but produces out of sight in far flung countries of the world? There is not the same easy measurement of social performance, even though there is much agreement about methodology in the Social Value Community. It makes me think that perhaps we should have been putting more emphasis on the social leg of this three legged stool for a long time now.
The second illustrated point is that our abbreviations don’t just speed up our communication and occasionally supply mild amusement, they positively direct and drive our behaviour. When ‘ESG’ first came out it was already true that everyone agreed governance was important (even if they only paid lip service) and environmental concerns were going to be easier to action than social ones. My contention is that how we structured our abbreviation pushed consideration by business leaders of Social impact and Responsibility into a very poor third place.
We are not bad people, but if you tell me to look at three things and I have the time to look at one, I will probably look at the first on the list. It is way past time for us to turn the list around and put social impact first.
It would be great to here your thoughts on this via the comments section below.
You can connect with Vincent on LinkedIn here.