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Beyond Compliance and CSR: A New Era of ESG

2021.05.03

A paradigm shift is occurring as the essential role of corporations is being reassessed.  Drastic market and systemic changes are dictating that corporations go beyond the pursuit of profits and realization of shareholder value.  In August 2019, the Business Round Table (“BRT”) issued a statement signed by 181 high-profile CEOs which redefined the purpose of a corporation as going beyond shareholder primacy to encompass a fundamental commitment to all of its stakeholders, by: delivering value to its customers, investing in its employees, dealing fairly and ethically with its suppliers, supporting the communities in which it operates and generating long-term value for its shareholders.  The media has since reported that the BRT’s “Statement on the Purpose of a Corporation” signals an end to shareholder capitalism, and transformation toward an inclusive capitalism that envisages sustainable wealth and shared prosperity.  There was also much discussion at the 2021 World Economic Forum about how corporations should adopt stakeholder capitalism in lieu of shareholder primacy. 
 
 
Compliance and CSR, a mere beginning 
 
Before ESG (‘Environmental’, ‘Social’, and ‘Governance’), there was CSR (‘Corporate Social Responsibility’).  CSR refers to self-regulating practices undertaken by corporations to be socially accountable, rooted in a recognition of past failure to perform societal duties.  CSR then evolved into ethical management and compliance management.  Compliance management establishes the fundamentals of sustainable business, but compliance is only a beginning.  Taking legal responsibility is no longer sufficient; it is now a mandate for businesses to actively take on social responsibility as “corporate citizens”, meaning that corporations need to be as accountable to society as its individual citizens. 
 
CSR has constantly evolved, moving away from a corporation’s passive role of being socially responsible to an active role of creating ‘shared’ value (or ‘social’ value, “CSV”).  CSV has been around for a while.  In Korea, many businesses have announced that they will pursue social values together with economic values; there are also companies that measure and publish their businesses’ social values along with their financial information. 
 
However, CSR has not fundamentally transformed the market.  There is a limit to what corporations can do by promoting social contribution activities and undertaking ethical management.  The realization of social value has been confused with conducting social contribution activities. 
 
 
ESG, an evolving trend of capitalism 
 
ESG is growing into an evolving trend of capitalism.  The concept of ESG originated from investors’ realization that investment decisions should go beyond financial considerations and be made in light of non-financial indicators.  This is premised on a belief that corporate value or potential sustainability is determined not only by financial factors but also non-financial factors.  As investors take ESG criteria into account, disclosing or reporting ESG-related indicators has become crucial, and ESG is now a core indicator in heightening corporate values. 
 
Contrary to any other past discourses of capitalism, ESG is a change originating from the market.  As many investors are participating in the UN Principles for Responsible Investment, businesses that overlook ESG find it difficult to solicit investment opportunities and even face the risk of losing them.  For instance, a major Dutch pension fund disposed of KRW 79,000,000,000 worth of Korea Electric Power Corporation (KEPCO) stocks for failing to downsize its investment scale in the development of coal-fired power stations.  In the financial industry, too, banks and other financial institutions have been more reluctant to provide loans to companies that do not take ESG seriously.  ESG, which may be deemed a type of social credibility, has become as important as financial credibility, and this is evidenced by a noticeable change in consumers’ and customers’ attitudes towards corporations.  Consumers praise ‘good’ corporations which operate in consideration of ESG, while turning away from ‘bad’ corporations which have undergone ESG-related mishaps. 
 
 
Changes in E, S, and G 
 
A change in the ‘environmental’ area is reflected in trading relationships.  Renewable Energy 100% (“RE 100”) is a global initiative to have businesses operate using only renewable energy; and participating businesses require the same level of commitment from their suppliers.  For example, Korean companies doing business with multinational juggernauts like Google have been asked to use renewable energy. 
 
In the US and EU, ESG has become a general trend and human rights management issues frequent the ‘social’ area.  In the past, human rights was mainly the interest of governments and civil organizations but is now heavily associated with corporations as well.  Today, corporations are even more closely connected to the lives of individuals and the environment than governments.  The UN has issued the Guiding Principles on Business and Human Rights; and the OECD has issued the Guidelines for Multinational Enterprises.  The new international standard requires corporations to honor human rights in line with internationally recognized principles, establish policies and procedures without violating human rights, and implement remedial measures against human rights violations. 
 
‘Governance’ has also transformed.  Routine shareholders’ meetings, sycophantic boards of directors, and companies controlled by the largest shareholder no longer provide tools to survive the market economy.  Japan’s Government Pension Investment Fund launched a new ESG index of women’s empowerment to benchmark the ratio of female workforce, new female hires and female executives.  Such investment indices are said to have played a role in changing the Japanese corporate culture. 
 
 
Conclusion 
 
If the past discourse was centered on corporate duties and obligations, ESG initiates a new discourse about the very purpose of corporations.  ESG overreach may encounter hurdles if it is considered merely as a way of soliciting investment opportunities.  It should be noted that pursuit of profits and creation of economic value are no longer sufficient to succeed in business – a fundamental change is necessary by integrating ESG in the corporate organization, culture and business. 
 
Experts postulate that changes in the corporate environment may actually transform the world since corporations’ abundance of wealth and resources allow them to be influential.  The future seems grim on the heels of global crises such as climate change, wealth polarization, rapidly aging populations, low birth rates and the COVID-19 pandemic.  ESG is not only a cause of market change but also a response to capitalist setbacks.  Let us hope that ESG will both save our earth and make our world a better place to live.

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