ESG is a relatively new concept and quite naturally, therefore, there is little awareness or understanding about it. Some organisations take ESG just as an extension of Corporate Social Responsibility (CSR). But that’s a very myopic view of ESG. It is a much larger concept that is related to investment decisions also. For businesses around the world, ESG is becoming increasingly important.
The concept of ESG, first popularized in 2005, refers to a broad range of environmental, social and governance criteria on which the performances of companies are measured. The practices of a company with respect to these parameters have been rather neglected in the traditional system of financial reporting. However, in this article we will not delve deep into the intricacies of the concept, but instead we will try to find out the connection between the concept of ESG and corporate moral responsibility. But first of all, we need to start with a few definitions that are crucial to understanding this subject.
Every individual is responsible for each of his/her activities or inactivities, decisions or indecisions and comments or silences. We are solely responsible for the impacts of all choices we make in our lives. While all such choices or actions do not necessarily have a ‘moral’ component in them, in our everyday life we often refer to certain things being the ‘moral responsibility’ of a certain person. By doing so we try to indicate that this certain person has some duties or obligations, meaning some responsibility, by a certain standard. Maintaining such responsibilities are expected of people both in their personal as well as professional capacities. In other words, these are their moral responsibilities. A person is held accountable for these duties and obligations.
Corporate Moral Responsibility
Having gone through the last paragraph, we now know what individual moral responsibility means. Now, the question arises, do businesses have moral obligations or responsibility too? Can the concept of moral responsibility be extended to artificial legal persons also? Is corporate social responsibility (CSR) different from corporate moral responsibility? For more than three decades now, the question as to whether companies can be held liable for their actions morally and psychologically, has been subject to heated debates around the world.
Let us have a look at it.
An organization is a group of people coming together wilfully to achieve a set of common goals. These individuals have collective accountability to all stakeholders. This collective accountability is referred to as corporate moral responsibility. The owner or manager of a business has multiple responsibilities, which include legal as well as moral responsibilities. The former implies maintaining various compliances, payment of taxes, corporate governance and so on while the latter imposes the obligation of doing what is right and accountability for all the actions of the business. Thus, corporate moral responsibility encompasses the entirety of opinions, decisions and actions with which individuals in charge of an organisation run it.
The following are some of the examples of moral responsibilities of business:
· Payment of fair and timely wages
· Non-employment of child labour or forced labour
· Workplace safety and healthy working environment
· Non-discrimination amongst employees
· Fair treatment of all employees
· Making available safe and good quality products to customers
· Accounting for social and environmental costs implemented
CSR vs. Corporate Moral Responsibility
One should definitely not confuse Corporate Moral Responsibility with Corporate Social Responsibility. Through the CSR framework, the regulators have ensured the contribution of certain profitable organisations towards the progress of the society. However, CSR does not have any scope for moral obligations of a business towards those whom it affects through its actions and to those who make a difference in it. Hence, corporate moral responsibility requires separate focus and emphasis.
ESG refers to what an entity has done or not done in the last financial year with respect to compliance of certain non-financial parameters that are required to be reported by it as a step forward towards serious sustainability movement globally. It is essentially used to evaluate non-financial factors like environmental impacts of a business, corporate sustainability and social responsibility. The sustainability of an organisation is valuable to all its stakeholders like the investors, employees, consumers, supply chain partners, bankers etc. With a view to promoting this sustainability, ESG focuses on the environmental, social and governance practices of an organisation that have been rather neglected in the traditional system of financial reporting. An organisation adopting ESG principles essentially means that in its corporate strategy it focuses on the three pillars of environment, social, and governance. Adopting ESG is an expensive and time-consuming exercise, but it yields returns in the future in the form of sustainability and greater investor trust. ESG reporting brings in transparency about the organisation’s activities, the risks it is exposed to and the measures it adopts to mitigate those risks and to ensure sustainability. The ESG Reporting requires an organisation to collect, analyse and disclose its ESG data. Both the availability and quality of ESG data collected and reported by an organisation are crucial from the standpoint of the stakeholders.
ESG and corporate morality
ESG can very well be described as the moral duty of a business. It mainly encompasses the moral impact of the business activities and governance of an organisation. ESG makes organisations look beyond their economic activities and apply considerations of ethics and morality in making better business decisions and developing more robust strategies.
In the business world, until very recently, the moral obligation of businesses were restricted to compliance of law in letter. To a certain extent morality was brought into businesses through the introduction of the stakeholder concept during the later part of the last century. Now with the introduction of #ESG, the concept of moral responsibility has been infused into businesses in a much greater way.
Today businesses are increasingly expected to do the ‘right thing’. Just as they contribute to social responsibilities, they are also expected to be morally responsible for their actions. To ensure this the persons steering the business and affairs of the organisation are expected to maintain a balance between maximising profitability and accountability, and between increasing business operations and philosophy and moral obligations. In this regard the introduction of the concept of ESG is a big step towards ensuring that the parallel intent of organisations towards increasing social well-being do not get derailed or side-lined, rather they remain in focus.