Environmental, social and governance (ESG) indicators are fast becoming a key consideration for listed companies and multinational organizations. Internationally, over 90 percent of listed companies are reporting their ESG performances, while in Hong Kong, more companies will issue ESG reports from this year after the Hong Kong Exchanges and Clearing (HKEX) strengthened its requirement on ESG disclosures.
It is important for organizations to consider how ESG helps the enterprise. The measurement of ethical behaviour, drives the creation of short- and medium-term metrics that are explicitly linked to long-term vision and strategy for value creation. These are considerations beyond just shareholder value and market share. In this process, it is crucially important for ESG leaders to be ethical leaders not only to form an important regulatory standard but also to facilitate integrated management across different functional departments to consider the relationships between ESG and financial performance when making decisions.
Ethics is a timeless concept
Adam Smith, the father of modern economics and a moral philosopher, wrote a great deal about ethics. “People stand always in need of each other”, “businesses desire to do good partly to gain approval and be known as good, and partly out of self-interest” and so forth. Regardless whichever motive is paramount, the purpose of business is still to create value by serving the needs of people. Howard Gardner, in the book A Synthesizing Mind, emphasizes the importance of creativity and morality going together hand in hand and suggests “excellence, ethics and engagement.”
The list goes on with numerous educators, economists and market leaders sharing their sentiment of ethics as a future proof system.
No man is an island
Two is better than one. A strong ESG culture can help to inspire employees when personal, organizational and social purposes meet. It helps employees to develop their own story about the why of the work, and the crafting narratives of purpose becomes the cornerstone for ESG.
ESG perspective is not just a vertical diagram but horizontally coming from diverse organizational stakeholders, breaking down the silos, emphasizing collaborative problem solving, considering broader implications of decision, and creating new solutions in their departments, their organizations and their communities. Leadership is key to this social influence process.
Ethical behaviour by leaders
Being ethical is a powerful way to create value because this creates trust, trust builds strong relationships, and out of relationships comes value. It is not just about following the rules and doing the right things but to instil distributed and relational leadership throughout the organization. Besides, ESG issues are in a wide spectrum, pressing and complex; we cannot rely on one person for solution and value creation. The leader therefore has two tasks: (1) to behave ethically (2) to persuade others to behave ethically.
Ethical value chain
Establishing the ethical position, communicating values and standards, motivating others, monitoring ethical performance and ensuring continuity are the engine room that powers the value creation process.
Many executives like to think of themselves as value creators. Actually, most value creation happens in the interplay between employees and customers. And so, mobilizing people, instilling trust and creating a culture of ethics at the heart of the organization is key. We may see an expanded balance sheet that includes people, risks and reputational factors for a new performance frontier.
To create a strong culture of ethics and ESG, leaders should consider taking the following actions.
Integration operationalized: As ESG is a cross-departmental issue, we need the actions of integrated business management. This calls for an understanding of differences functionally and even culturally. Systems thinking to build a symbiotic relationship between departments and cultural universalism to bring forth commonality with empathy and respect for a shared future would be key to an ESG culture.
Communication for resonance: An ethical leader communicates for resonance to build shared understanding and vision of a common future. In the ESG context, creating a new way of looking at the world and connecting business more strongly with society, we should start to align our world views and craft our voice of 4Ps: people, planet, purpose and principles, to transform minds and facilitate actions.
Promoting intrinsic desire: In our society that celebrates cognitive strength for our academic and career performance, we often overlook our affective domain to drive intrinsic connection for many essential soft skills that we need for leadership. Our head and heart have to go hand in hand to set clear targets and goals, and transform mindsets to effectively initiate changes.
New mindset and skillset for a new era
In today’s world, we need a shift of mindset and behaviours to find opportunities for co-created value. There are many fluid skills that will fade as the market changes but lateral skills for leadership is transformational. We need to continue our professional development in both technical skills and humanistic soft skills to progress with the market and the world.