Companies focusing on social and environmental issues worldwide are being criticized for not living up to their promises. What would it take for companies and critics to find common ground?
Take a multinational FMCG company X, that has existed for decades in the industry. It has recently shifted its rhetoric from solely providing everyday goods to serving a greater purpose of making living sustainable. Despite their efforts, the disapproval from their shareholders was harsh: they should not have jumped out of their core function of maximizing profits as a business.
The story of company X is nothing but ordinary. Many companies around the world today are tapping on social and environmental issues in their agendas. The purpose-led communications of many businesses have lately received a lot of criticism from investors, shareholders and conservative politicians, claiming that companies pursuing to do good do not comply with their words.
However, there is more to the story than companies going ‘’woke’’ solely to make a profit. One defining factor, for instance, is the size of the company.
According to Dr. Christopher Wickert, an Associate Professor of Ethics & Sustainability at the VU University and Director of the VU Center for Business & Society, big corporations are often not the leaders of sustainability, even if they would claim so. “For big companies, picking up trendy buzzwords often does not have much substance. Recent research actually shows that smaller businesses are often able to act more responsibly in comparison to big corporations. The bigger you are, the more cost-effective it is to do greenwashing than actually become sustainable,” he says.
Wickert continues that small companies have more leeway to invest in social initiatives due to passionate leadership and less pressure from shareholders to maximize profits and performance. Today it is challenging for customers and investors to distinguish genuine companies from those riding the free wave of trending social issues.
Those who have followed company X’s pursuit of sustainability and social purpose face pressure not only from their shareholders but also from more conscious consumers. According to A DELOITTE SUSTAINABILITY & CONSUMER BEHAVIOR REPORT, compared to 2021 consumers have significantly increased their focus on aspects such as consumption behavior, meat consumption, and opting for low emission modes of transportation. Today, the world is surrounded by several crises of global importance. We live in an era where overpopulation, the COVID-19 pandemic and the supply chain crises, just to name a few, all occur within the context of an ongoing climate crisis. When many people, rightfully so, feel that something in the current economy is not quite right, a business that promises to make the world a better place is an appealing one.
At the same time, the critique often goes that businesses should not involve themselves in politics. But what is the harm of bringing more awareness to issues that are, objectively, going to influence everyone? Innovative solutions such as developing technologies that can keep global warming on a 1.5 -degree pathway will be critical, even more so in the future.
Companies that decide to make an impact, however, should pay attention to detail. According to Wickert, having a big budget or a grand-sized sustainability department in itself is not indicative of sustainability integration in any company. Instead, it is much more important for functional departments of companies (i.e. operations, marketing) to integrate ethical and sustainable policies. “Companies advanced in sustainability do not need a sustainability department, but instead, it is a natural way for them to do things,’’ Wickert continues.
Internalized actions could include things such as affordability analysis or tax implications. For companies to arguably function as change agents they could also donate to charities or launch awareness campaigns that have no direct added benefit to themselves.
“Companies advanced in sustainability do not need a sustainability department, but instead, it is a natural way for them to do things,’’ Wickert continues.
Blaming companies like X for trying to boldly draw attention to social issues in the current environment is easy, as the optimal way to do things remains unclear. Many investors and other entities evaluate companies based on the different ESG or CSR guidelines that are both large in numbers and inconsistent. Companies themselves might use such guidelines as means to increase their own credibility, rather than doing any tangible improvements for the society. There is no consensus on who should be part of the criteria, nor about who should set them. “There are many reliable and unreliable entities giving ratings, logos and labels. But what is the role of an ESG ranking if even the worst companies are part of that?’’ Wickert asks.
While governments and entities such as the European Union are trying to claim the regulatory space of ethical criteria, right now many of the criterias are established by private companies. Whether following such guidelines should be voluntary or mandatory is another unanswered question Wickert mentions. He doubts that leaving the decision to companies themselves is not going to work: “A company can have a lot of ethical violations and still get a high ESG score. Evidence for these guidelines to serve the planet rather than corporations is very thin,” he explains.
Being able to evaluate whether a corporation is committing to social goals beyond its efforts to maximize profits should ideally come from a centralized, non-partisan entity. The good thing is that a lot of frameworks, such as the Sustainable Development Goals are already in wide use. What the current system lacks is coherency.
Not having clear guidelines will make it more difficult for customers, investors and clients' ability to distinguish between genuine companies and those just talking. Evaluating companies doing ESG is not easy - they can be measured with factors such as employee turnover, but their monetary value often remains unclear. Companies could improve for example by using transformation methodologies, or establishing themselves as a public-benefit corporation.
“A company can have a lot of ethical violations and still get a high ESG score. Evidence for these guidelines to serve the planet rather than corporations is very thin,” he explains.
Leaders of company X and many alike have already realized that making as much money as quickly as possible will not guarantee a successful business over time. Still, many companies find purpose-led strategies a difficult territory. Mostly because they lack directly visible gains. Evidence is however stacking up to show the long-term financial benefits to companies that actively work to solve societal problems.
Like socially aware consumers, investors’ views are slowly shifting. According to PwC’s Global Investor Survey from December 2021 shows that 34 percent of investors would compromise on return of investment if the company would have a beneficial impact on society or the environment. Further, many investors today are looking into funding green initiatives, as achieving net-zero goals will require a significant economic transformation. Every year US$ 40 billion is invested in forest preservation alone. To put things into perspective, in 2022 the US spent US $350 billion to boost consumption and speed up the recovery of the post-pandemic US economy. Although the benefits of forest preservation may only materialize after a long time, they will surely have a long-lasting impact.
Companies paying attention to diversity will also now more likely than ever outperform their less diverse peers. According to a McKinsey report on diversity, equity and inclusion in 2020, there remains a strong business case for both gender and ethnic diversity as well as cultural diversity. Like many others today SMARTKAS values the individual qualities of every employee regardless of their background.
The entire wokeness discussion stems from the fundamental difference between the current economic system and making sustainable decisions for the planet and society. However, inaction will certainly be more costly than taking long-lasting steps to the future. Successful and profitable business and social awareness can coexist, as long as it is deeds and not just words.
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