Posted by Jonathan Neilan, Peter Reilly, and Glenn Fitzpatrick, FTI Consulting, on
Sunday, June 28, 2020
Jonathan Neilan is Managing Director; Peter Reilly is Senior Director; and Glenn Fitzpatrick is a Consultant at FTI Consulting. This post is based on their FTI Consulting memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).
Putting the ‘S’ in context
In early 2019, we wrote a paper highlighting that the focus on Environmental, Social & Governance or ‘ESG’ issues in the capital markets had firmly shifted from the margin to the mainstream. This shift was reflected in the scale of capital being invested in ESG oriented investment funds alongside a generally greater societal awareness (and acceptance) of an urgency to step up efforts to address environmental issues and climate change.
As we continued to engage with companies and investors during the course of 2019—and we assessed the corporate reputation challenges being encountered by many companies—it became increasingly clear that factors which fall within the ‘S’ of ESG are as common as (and for some companies more so than) those within ‘E’ and ‘G’ in contributing to business risk and, in turn, causing lasting damage to a company’s reputation.
Factors which fall within the ‘S’—frequently customer or product quality issues, data security, industrial relations or supply-chain issues—commonly impact businesses and ‘destroy value’. This prompted us to reconsider if ‘social’ was the correct word for the ‘S’ in ESG and whether ‘Stakeholder’ might be more appropriate. Indeed, the use of the term ‘social’ may have contributed to a failure to conceptualise the ‘S’ in ESG, leading to an absence of focus and measurement from the market.
The scope of ‘S’ has progressively widened over the past two decades, which reflects the evolving business environment of the 21st century where businesses and markets are increasingly interconnected and interdependent. Over and above human rights; labour issues; workplace health & safety; and product safety and quality, ‘S’ factors now also incorporate the impact of modern supply-chain systems and the adoption of technology across all business sectors.
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