Few doubt that ESG principles are here to stay; the debate is now over how they should expand and improve.
The acronym – Environmental, Social, Governance – synthesizes three principles that companies must follow to ensure their business is sustainable: mitigate the negative impact and, preferably, generate a positive impact on the environment; act in a socially responsible and positive way; have a transparent governance system that works in concert with all stakeholders. In short, it is about seeing results and prospects of continuity while working for the common good, which would presume to protect citizenship.
What differentiates ESG principles from previous phases in the transformation of capitalism – which evolves from corporate philanthropy to private social investment, is built on corporate social responsibility and flows into the sustainability imperative – is that the game is played on the financial market’s board. According to the Global Sustainable Investment Alliance, sustainable investment assets totaled $35.3 trillion in 2020. Bloomberg estimates the figure will reach $50.0 trillion in 2025.
The scrutiny of financial analysts rationalizes and deepens the assessment of companies’ sustainable performance. The sudden increase in the value of specialized services providing ESG ratings, demanded by investors and regulators, demonstrates that the assessment process will grow. There will be no space for “greenwashing” or “social washing.”
It is true that there is still a marked effectiveness gap between the advance of the ESG agenda in companies and real improvements in the world. Extreme poverty has increased again, for the first time in 20 years, according to the World Bank. Between 9.1% and 9.4% of the global population lives on less than $1.90 a day. There are 160 million victims of child labor, according to the International Labor Organization. And the latest report by the UN’s Intergovernmental Panel on Climate Change (IPCC), released in August 2021, reveals that we humans have raised the global average temperature by 1.1 degrees Celsius, by emitting greenhouse gases, causing extreme weather phenomena that will only accelerate.
In turn, the climate emergency is prompting the growth of the low-carbon economy, boosting investments and ESG credits for companies that have already placed sustainability at the heart of their business strategy and for those, which form the vast majority, that want or need to migrate to the new model. Financing this process increases the requirement for metrics, targets and measurements.
Accountability for positive corporate conduct has been around for more than three decades, starting with the voluntary and unregulated publication of “social responsibility balance sheets.” At the time, few companies were committed to acting and reporting consistently, while many “marketed” arbitrary actions such as donations to nursing homes. In Brazil, the creation of the Ethos Indicators of Corporate Social Responsibility, in 2000, was the turning point for seriousness. The same year, the first version of the GRI Guidelines was launched by the Global Reporting Initiative, which in 2016 evolved into the GRI Standards, the first global standard for sustainability reports.
Now, science-based targets and the integration of sustainability reports into annual financial statements are emerging, increasing analytical rigor and the pressure for companies to migrate to a low-carbon and more inclusive economy. There are those who already say that the planet will be saved by accountants.
An analysis of the history of ESG indicators reveals the evolution of improvements in the world that are considered within the reach of companies. The list is now extensive and covers the most varied environmental, social and governance topics. Therefore, it is noteworthy that one of the most relevant issues for society and business is not explicitly addressed: the defense of democracy.
The Democratic State Governed by Rule of Law is a defining achievement for society. The right to vote in free, fair and regular elections; freedom of expression and political organization; respect for minorities and the rule of law, among other foundations, are drivers of human development. Democratic countries are more developed, educated, healthy, equitable and rich. Freedom and equality of rights and duties also form the basis of the market economy. Every company and every business leader should strive to protect it.
Despite its undeniable service to civilization, democracy is under attack. The latest edition of The Economist Intelligence Unit’s Democracy Index reveals that it continued to decline across the planet in 2020. The survey rates 167 countries based on five measures – electoral process and pluralism, the functioning of government, political participation, democratic political culture and civil liberties – and finds that only 8.4% of the world’s population live in a full democracy, while more than a third live under authoritarian rule. The global average score of 5.37 out of ten is the lowest recorded since the index began in 2006. Brazil is in 49th place, with 6.92 points, above the global average, but below the 7.38 points it held in 2014 and 2008.
The decline of democracy is reiterated by Freedom House, the oldest American organization dedicated to its support and defense around the world. Founded in 1941, the institution has adopted social science analysis methods to assess the level of freedom in each country since 1973. Its 2020 report shows global freedom declining for the 15th year in a row. And countries seeing deterioration have outpaced those seeing improvement by the largest margin since the negative trend began in 2006.
The long democratic recession is deepening. How can companies and business leaders be unconcerned with this fact?
In the U.S., Donald Trump’s threatening extreme right-wing populism has sparked initiatives such as the Leadership Now Project, a coalition of business leaders that works to protect and renew American democracy. The network was founded in 2017 at the initiative of former Harvard Business School students. On its Academic Board are veterans like Michael Porter and new thinkers like Rebecca Henderson, author of the book Re-imagining Capitalism in a World on Fire.
In Brazil, the “Trump of the Tropics,” Jair Bolsonaro, acts openly to apply a self-coup that has not been consummated, so far, not for lack of effort, but because of its instigator’s lack of competence, as well as the strong resistance of the press, the courts and the legislative branch. The business environment that, with few honorable exceptions, remained silent, finally awoke from its lethargy when a large and significant group of leaders published, in August of 2021, the manifesto “The Elections Will Be Respected,” in support of the Brazilian electoral system, systematically attacked by Bolsonaro as part of his plot.
The Democratic State Governed by Rule of Law is the basis of free-market capitalism, due to its close relationship with the economy and business. Respect for the law and the decentralization of power make the economy more dynamic and prosperous to generate opportunities to improve people’s lives. The effects are reflected across many items on the sustainability agenda and, above all, are in line with its ethics.
We are committed to the transition from “shareholder capitalism” to “stakeholder capitalism,” a formulation developed by Klaus Schwab, creator of the World Economic Forum (WEF), which has been systematized in its recent editions. Conceptually, this principle induces companies to take a position in the trenches of defense of citizenship.
For all these reasons, the protection of the Democratic State Governed by Rule of Law must be incorporated into corporate responsibility, and it should begin to be specifically formulated and introduced in ESG criteria matrices.
In existing systems, the concept is only explicitly included in the UN Sustainable Development Goals, in objective 16 “Peace, Justice and Strong Institutions,” under items: 16.3 “Promote the rule of law at the national and international levels and ensure equal access to justice for all;” 16.7 “Ensure responsive, inclusive, participatory and representative decision-making at all levels;” and 16.10 “Ensure public access to information and protect fundamental freedoms, in accordance with national legislation and international agreements.”
In the GRI Standards, the issue is referenced, but not addressed, in Standards 412 “Human Rights Assessment;” 413 “Local Communities;” and 415 “Public Policy.” It is also not explicitly included in the impact assessment system for Certified B Corporations, only partially related to the Standard “Community: Civic Engagement & Giving.” Even the recently launched “Stakeholder Capitalism Metrics,” by the International Business Council of the WEF, only address citizenship rights indirectly and partially, in the item “Community and Social Vitality” of its “Pillar 4: Prosperity.”
Trump’s threat to American democracy ended up spurring corporate activism. Microsoft has positioned itself against the restrictive voting legislation enacted in Georgia; HP, Unilever, Patagonia and Salesforce called for expansion of voting access in Texas; Airbnb, PepsiCo, IKEA, among others, signed a letter in support of federal voting rights legislation; Dow, Toyota, Mastercard, AT&T, Deloitte, Morgan Stanley, Amazon and Walmart, among more than a hundred companies, stopped funding Republican congressmen and senators who voted against certifying the 2020 election.
These are examples of actions that can inspire the development of principles to be incorporated into sustainability reports and certification standards. Regulation would encourage and guide companies to act as guardians of the Democratic State Governed by Rule of Law.
Yacoff Sarkovas
