Principia Advisory

Prepare for the unexpected with an ethics-based approach to ESG

22nd March 2022

We can’t always know what the next major incident to shape our world will be, but whether it’s a global pandemic or a war in Europe, there’s no question that large-scale events have far-reaching consequences. Recent times of crisis have only increased the expectations on businesses to make ethical commitments – and live up to them. Yet many organizations’ Environmental, Social, and Governance (ESG) approaches are focused primarily on meeting the relevant minimum legal, regulatory and accounting standards, which cover just a small range of ethical issues.

Pressure to measure and report on ESG standards has outweighed attention to the implications of ESG commitments for critical business decisions.

So how can you ensure your organization’s approach to ESG enables you to make timely and effective decisions about how to act, when faced with events which are complex, fast-moving and hard to predict?

Risks of a narrow regulatory and legal focus on ESG

The Covid-19 pandemic highlighted how difficult it can be for businesses to know how to do ‘the right thing’ in unprecedented circumstances. Treating ESG purely as a reporting mechanism means organizations can only be reactive in the face of unexpected events like these, risking both reputational damage and a loss of competitive advantage. Meeting minimum ESG requirements, for example, does not help organizations make (or predict the outcome of) decisions such as whether to furlough employees, implement workplace social distancing or mandate vaccines for staff.

Similarly, a narrow focus on meeting legal requirements on supply chain standards leaves an organization ill-equipped to make tough decisions when the act of trading with certain partners or in certain states becomes politicised, such as in the case of Russia following its invasion of Ukraine. But customers are quick to judge slow or poor ethical decision-making: while some companies were hailed for voluntarily ceasing business in Russia, others, like McDonalds and Starbucks, have faced immense public pressure to suspend operations.

There is often no single ‘right’ answer and difficult trade-offs are inevitable where multiple interests are at stake in high-pressure situations. Yet the public response to the actions of organizations during recent events has highlighted how a narrow focus on shareholder value, without taking wider ethical considerations into account, is no longer broadly viewed as an acceptable business model.

Benefitting from an ethics-based approach to ESG

By reimagining ESG as a key pillar of decision-making, rather than a negative constraint on business, organizations gain the strength of effective foresight and the capacity to draw a clear rationale for action during difficult times.

Implementing an ethics-based approach provides a system for understanding and managing priorities, which can be applied throughout the structures and processes of an organization and to all decision-making – no matter how unpredictable the circumstances. This boosts a company’s ability to meet diverse and changing expectations, including those of shareholders.

But ethical decision-making is not just helpful in times of crisis.

While the 2022 Edelman Trust Barometer found the public were more likely to trust businesses above other types of institution, around half of respondents believed companies needed to ‘do more’ to actively address societal problems, including climate change and economic inequality. As consumers increasingly base purchasing decisions on organizations’ ethical stance and actions, robust ESG is fast becoming a business priority on the global stage.

Organizations that do this successfully will be the ones that go beyond crisis-response to embed integrity and the capacity to engage with societal challenges at the heart of their operations. And in doing this, they will also set themselves up to respond effectively the next time that crisis hits.

 

Unsure where to start with implementing an ethics-based approach in your organization? Principia uses the latest academic research and proven practical insights on organizational ethics and culture in order support businesses and complex organizations to tackle some of their most pressing challenges.

Contact Marta Noran (marta@principia-advisory.com)

 

With thanks for additional input to this article to:

Catherine Greene, Specialist Advisor at Principia, and Research Associate at the Centre for the Philosophy of Natural and Social Science at LSE

Kinanya Pijl, Senior Associate at Principia, and Assistant Professor of Private Law at the University of Amsterdam

About the author: Marta Noran is an Associate Principal at Principia. She specialises in organizational culture and the integration of social and behavioural sciences with data analytics. Marta began her career in energy and emissions trading, before transitioning to sustainability and ethics consulting, leading environmental impact assessments, effectiveness and feasibility studies, and large primary research projects across ethics, responsible leadership, and sustainable development. She has extensive experience advising corporate and NGO clients across the Americas, Africa, Europe and the Middle East.