From the strictly economic vision to the sustainable vision
"The business of business is business". This thought led managers to demonstrate concerns other than the prosperity of the business, to be replaced by others unless this concern brought some monetary advantage. From the point of view of the economic social responsibility, led by Milton Friedman, Nobel prize in 1976, the responsibility of managers is only to increase the value of the company to shareholders.
This more economical view of the business, has, however, changed in recent years, with authors such as Archie B. Carrol, professor at Terry College of business, University of Georgia, who advocate a responsible side of companies. According to Carroll, business social responsibility covers the economic, legal, ethical, and discretionary expectations that society has of organizations at a given time, and has arguments such as the fact that some companies, such as coca-cola, are more global and permanent than governments since they have existed for many years and are present in more countries than government associations such as the United Nations. These companies must therefore be positive sources for the world in the various components, as they are one of the agents that have more impact in sustainable development and must play their part. This vision gains increasing weight since, due to the increase in events such as deforestation, global warming, the increase in social inequality, and the lack of ethics in cooperative management, the ability to meet the needs of future generations is not certain.
What is ESG?
The acronym ESG arises from the English "Environmental, Social and Governance", which synthesizes its three pillars. This has become the benchmark for business and investment practices that focus on sustainable development and therefore not having profit as an objective.
Why is ESG so important?
This view completely changed the relationship between companies and their investors, since sustainability criteria began to enter at the risk models and became investment factors, thus being considered part of the company's financial strategy.
So what are the three pillars of the ESG?
Environmental: Indicate the company's behavior in relation to environmental problems such as climate change, biodiversity preservation, pollution prevention, and the circular economy. According to Forbes magazine, 3 out of 10 U.S. companies have suffered operational impacts related to disasters. The scarcity of resources, leading to increased prices of raw materials or lack thereof, the increase in the price of insurance, or the bad environmental reputation leading to consumer mistrust, also present themselves as risks associated with the environmental factor.
Examples of environmental sustainability:
Some good examples of environmental sustainability are companies like Auchan with plastic that is separated in their stores and sent to a partner, to use it as a raw material to produce reusable bags, which will thus be used by customers several times, until they are recycled again. Auchan thus implements the Recycling ->Produce ->Use Standards, which are based on good practice of circular economy. Also, projects such as Caetano H2.city Gold stand out in the scope of environmental responsibility, where through a partnership with Toyota, presents a bus completely 0 emissions, which moves through a hydrogen stack, and that already moves in cities like Cascais.
Social: Refers to problems of inequality, inclusion, relations at work, investment in human resources and communities, as well as human rights. This pillar, is responsible for the motivation and well-being of employees, ensuring that they are framed with the company and with the environment.
Examples of Social Sustainability:
Companies such as Jerónimo Martins are already represented today in programs such as the UN's Target Gender Equality, which aims to set ambitious goals for the representation and leadership of women. The inclusion of people with disabilities is also a key issue these days, and there is already legislation on the subject such as Law No. 4/2019 which "establishes a system of employment quotas for people with disabilities, with a degree of disability equal to or greater than 60 %, aiming at their hiring by private sector employers and public sector bodies" for companies "with a number equal to or greater than 75 workers and large companies". However, there are also initiatives such as the Inclusive Community Forum, supported by Nova SBE, and 24 companies such as Brisa and Microsoft that promote inclusion and change of mindset in relation to the employment of people with disabilities. Finally, the concern with good management of Work-Life Balance is something highly valued these days, and remote work has facilitated, on the one hand, the flexibility of workers, but also brought the difficulty of separating personal life and professional life, something that has greatly harmed young people.
Governance: Includes problems related to governance structure, executive compensation and evaluations, and how they communicate with employees. It plays a key role in the decision-making process on social and environmental aspects. This pillar is responsible for defining the entire strategy of the company, and for ensuring that the company demonstrates a purpose that all employees are ready to follow and that seeks to ensure the best possible quality to all consumers and customers.
Examples of governance:
Some good examples of Governance are presented by companies such as Caixa Geral de Depósitos, which is defining a clear mission focused on sustainability and has created with this objective a sustainability committee, which is an advisory body of executive committee that oversees the management and guides the decision regarding the definition and implementation of the sustainability strategy. In addition, they are doing an annual reassessment of the collective adequacy of the management body, and the supervisory and individual body of its members was also implemented.
In this way, ESG has become a factor of great impact on the company's reputation, regardless of their financial results, since today we are facing a scenario in which the purpose of a company and its values are increasingly valued for their different stakeholders
Current sustainability trends
Sustainability, which is defined as the ability to meet all existing needs of today without compromise the needs of others, and future generations, is now the main point, and there are several trends within various sectors.
Energy: Despite the enormous impact that covid-19 has had on the energy market, with a considerable decrease in energy use during periods of lockdown, economic recovery policies should facilitate the reduction of carbon emissions to reach the "Zero Carbon" target by 2050. In addition, this trend also aims to have a positive social impact, according to the European Renewable Energies Federation and the International Renewable Energy Agency, 10 million dollars invested in renewable energy creates three times more work than 10 million invested in fossil fuels. For this mission, there are guidelines defined by governments as The Council of Ministers Resolution No. 107/2019 3 – a) which highlights the importance of "Decarbonising electricity production, eliminating electricity production from coal by 2030 and continuing with the total decarbonization of the electro producer system by 2050, betting on renewable endogenous resources;"
Economics and finance: Rating agencies are focusing more effectively on ESG factors in their assessment to take into account their impact on sustainable development, and increasingly value climate change as an inherent risk to the company. According to a report by Allianz Global Investors, there is a strong and growing interest in sustainable investments in Europe. In Portugal, about 92% of investors are interested in sustainability-related issues and 87% say they would invest in funds with sustainable development goals.
Mobility: A large part of the population now lives in cities. However, the pandemic has led people to rethink where they like to live and where they like to move. According to a report presented 24th United Nations Conference on Climate Change (COP 24), in Katowice in Polónia, transports account for 22% of global emissions being central to the passage to a world with 100% of electric vehicles. For this change, there are currently several guidelines such as the bill presented that aims to commercialize light vehicles powered exclusively by fossil fuels from 2035.
Consumption: The shift to sustainable materials has been one of the most prominent topics in the field of food consumption, especially with regard to eliminating the use of single-use plastic material, reducing the use of plastic bags, or using non-recyclable packaging. There is also a growing concern about giving a second life to various products that are no longer seen as useful to many people. Stores such as cash converters, which is a worldwide franchise specializing in second-hand sales, are now very popular with consumers.
Food production: Innovation to make food production chains more sustainable has been another important issue, with the increase in the number of people following vegetarian and vegan regimes, thus reducing the consumption of meat and derivatives, both for health situations and for ethical reasons. Indeed, according to the University of Oxford, the consumption of 90g of red meat per day increases the risk of bowel cancer. In addition, most of the meat comes from animals created for slaughter, and this type of crop is one of the major responsibility for the pollution of lakes and rivers, due to the release of excrement from the animals, and one of the main responsible for water consumption. At the level of agricultural production, we also check the primacy of a monoculture production, i.e. the cultivation of a single agricultural product, in a given area. This type of production allows to reduce costs and reduce the cultivation time but is the main responsible for the exhaustion of the soil, that is, the depletion of nutrients in this area. In order to combat these problems, new forms of cultivation are already used in the Netherlands today, such as precision agriculture in so-called "vertical farms". This type of agriculture is practiced in a greenhouse, in which, for example, tomatoes are grown in small bags of mineral wool, something that allows greater control of nutrients and water required. This type of cultivation thus manages to use less water and pesticides than outdoor cultivation, thus making it more sustainable. According to Leo Marcelis, professor of horticulture at Wageningen University and Research (WUR), “In the future, there will be vertical farms that will be as tall as buildings and that will only use artificial light" adding that " this will make agriculture completely climate-independent and completely reliable."
What are the advantages of sustainability for companies:
Sustainability is today, much more than just a trend since with the growing concern of young people about these topics, companies that are not concerned and have a positive impact on sustainable development will have difficulties in attracting and retaining employees, retaining consumers, and attracting investors.
In addition, investors recognize that ESG factors may influence the direction of the company in the long term, requiring that these factors be incorporated into the company's annual reports. With this paradigm, a company's performance in ESG factors will influence its valuation and may increase or decrease the cost of capital.
Thus, betting on the sustainability of your company presents the following advantages and opportunities:
Generating a positive impact: By being a positive force for society, in addition to improving the environment, which is already an advantage, it will generate greater confidence of its consumers in its products.
Customer loyalty and increase consumers: By being more sustainable, the company will be meeting the needs of consumers, as they seek sustainable products, socially responsible and with a higher nutritional value, such as products with sustainable packaging, environmentally friendly technologies, or biological products. This will not only help to retain consumers but also to raise new ones for your company.
Attract and retain employees: It will also be possible to find more potential candidates to work in the company and more satisfied and committed employees. Companies such as Jerónimo Martins are already represented today in programs such as the UN's Target Gender Equality, which aims to set ambitious goals for the representation and leadership of women. The inclusion of people with disabilities is also a key issue these days, and there is already legislation on the subject such as Law No 4/2019 establishing a system of employment quotas for people with disabilities, with a degree of disability equal to or greater than 60 %, with a view to their employment by private sector employers and public sector bodies for companies “with a number equal to or greater than 75 employees and large enterprises". However, there are also initiatives such as the Inclusive Community Forum, supported by Nova SBE, and 24 companies such as Brisa and Microsoft that promote inclusion and a change of mindset in relation to the employment of people with disabilities. Finally, the concern with good management of work-life balance is something highly valued these days, and remote work has made the flexibility of workers easier, but it has also brought about the difficulty of separating personal and professional life, something that has greatly harmed young people.
Offer of innovative and differentiated products: Adapted to the expectations of new customers and investors, looking for new more sustainable products. One of the ways to create innovative and differentiated products is the circular economy, which replaces the end-of-life concept of many products giving new lives, through reduction, reuse, recovery, and recycling of materials and energy. An example of circular economy success is Auchan with plastic that is separated in its stores and sent to a partner, to use it as a raw material for the production of reusable bags, which will thus be used by customers several times, until they are recycled again. Auchan thus implements the Recycle → Produce → Use Standards, which are based on the good practice of circular economy. In addition, also the use of innovative and environmentally friendly technologies, are ways to create differentiated products that meet the needs of consumers, as are the examples of the Caetano H2.city Gold project that through a partnership with Toyota, presents a bus completely 0 emissions, which moves through a hydrogen stack, and that already moves in cities like Cascais. Also in the construction, there are today plans for the construction "greener" as you can see in the existing apartment blocks, made of wood, in Sweden, where there is a massive availability of this type of material, which takes the advantage in terms of costs. In addition, wood is also lighter than steel reducing transport costs and is more sustainable due to the near absence of waste and poor CO2 production in its manufacture.
Easier access to finance: Focusing on ESG pillars, the company will be seen as more sustainable and at lower risk. This will make it easier to get close contact with investors and lenders, and you will have easier access to project financing. This trend is underpinned by the exponential increase in debt bond issuance, corresponding to sustainable projects and a growth in social bonds of $17,000M in the EU.
Lower cost of capital: As concern about ESG factors reduces long-term risks, increases the quality of governance, and improves communication with stakeholders and shareholders, the company will achieve more capital and cheaper.
Competitive advantage: All these advantages together will make the commitment to sustainability become a competitive advantage for the company, which will thus stand out from the rest, with younger people interested in the company, more committed employees, and more loyal consumers, also managing to have a positive impact on the environment.
The main challenges in the vision of sustainability:
Lack of concrete and common definition: There is still an inaccuracy of concept with regard to sustainability, due to the intangibility of many items of ESG factors, which brings difficulties for companies to adopt these policies.
Difficulty in measuring ESG factors: Some factors are difficult to measure, resulting in a lack of transparency, and credible and comparable information, especially in the areas of the environment and social, where sometimes measurement is not as evident as in governance and strictly financial factors. Thus it becomes also difficult to weigh these factors in risk models.
Short-term need: The need for companies to return in the short term limits the long-term sustainability thinking and to assimilate all their risks.
Barriers to technological development: Due to the high costs of research and development of new technologies, as well as their implementation, sometimes the introduction of innovative and environmentally friendly technologies is seen as too high a risk.
Today, sustainability is a focal point for all companies. The change depends on each one of us, and Bright Concept implements several sustainable measures in the environment and governance and that is also why we are a B Corp. We will now also reward companies that are contributing more to sustainability in Portugal and Angola and thereby, in partnership with 14º graus and Sustentare, we'll extend the scope of intervention in sustainability.
What are you going to do this year to contribute to the sustainability of your organization or community?