So, when thinking about sustainable business, we have a baseline that the business must operate in a way that has a neutral or positive effect on the world around it. In doing that, the business can be sustained in the long term. But how do we determine whether a business is having a neutral or positive effect? There are three different areas that are generally accepted as the pillars of sustainability: environment, social and governance; and businesses are encouraged to think about their direct and indirect actions and impacts across these areas.
The first pillar focusses on environmental aspects. Some of the areas this considers include:
- Waste/pollution management – so reduce/reuse/recycle
- Resource depletion and use – are you using finite resources, can you reduce resource use, are you using renewable resources
- Greenhouse gas, energy or carbon use – is the business contributing to climate change, are they being responsible in their carbon use
The next pillar focusses on social aspects. Some of the areas this considers include:
- Responsible treatment of people in the supply chain (diversity, working conditions, fair wages)
- Local communities
- Health and safety
- Human rights and conflict
The final pillar focusses on governance aspects. Some of the areas this considers include:
- Calculation and payment of taxes
- Executive/owner pay
- Donations and lobbying
- Corruption and bribery
- Ethical standards and transparency
When looking through the list, it’s clear why some of these aspects would be considered negative or unsustainable. For example, if all businesses avoided tax, it would cause significant issues for our government budgets and is therefore unsustainable. We’re now really clear that excessive use of certain materials, like oil, carbon and even water, are unsustainable long-term, they’re bad for the environment and we expect businesses to find alternative resources to use. And given the frequency of headlines discovering slave labour and poor working conditions for indirect employees in a company’s supply chain, it’s obvious that we no longer consider that acceptable.
These factors are becoming especially important for investors comparing companies, with the idea being that investors are looking for solid financial performance, alongside positive and proactive performance across the 3 ESG measures.
When comparing businesses, most people would expect to see strong performance across all 3 areas. And given each of the 3 areas is somewhat interdependent, this isn’t surprising. Conversely, as great as it is for a business to excel in one area, this doesn’t make up for poor performance in a different area e.g. a business runs completely on eco-friendly power, but is known to employ children and enslaved women in a foreign country. So a balance across all 3 areas is important. As consumers, I’m sure that you also have a particular area where you are more concerned about strong performance, and that’s helpful to know too!
On a smaller level, it’s unfeasible for businesses to record and publish metrics across all 3 ESG measures to demonstrate their sustainability. However, every sustainable business should be able to speak to each ESG pillar to demonstrate the efforts they’re making in the area. And it should be more obvious then when businesses aren’t making any efforts to operate sustainability and/or are ‘greenwashing’.