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ESG: A Tough but Essential Framework, Now More than Ever – from Purpose to Measurable Outcomes
Insights from Council Leader Rika Nakazawa, Group Vice President, Industry X Co-Innovation, NTT, Ltd.
When I first discovered Berkeley Law School’s course on Sustainable Capitalism and ESG earlier this year, I was immediately captivated by the description: “Capitalism is at a crucial juncture. Our next steps will dictate the future of our economy, society, and planet. Join the debate & earn a certificate in Sustainable Capitalism & ESG.” Evidently, I wasn’t the only one as when I tried to register there was an extensive waitlist. When I did get accepted and enrolled, I discovered that my fellow classmates were from all walks of life and varying levels of professional seniority, from all over the world. We were all galvanized by a sense of urgency which only became more heightened as the course advanced and illuminated the role ESG would play in not only how we would survive as a society and in business coming out of COVID, but more profoundly, thrive in a whole new way.
My own interest in ESG evolved out of my commitment and dedication to Diversity and Inclusion (D&I) throughout my career – during which I founded a venture to advance diversity in senior leadership and produced an Amazon best-selling book that features the journey of women board leaders. As I delved further into how D&I is a critical aspect of outcomes and performance of teams – such as the linkages between diversity and innovation in particular – I had started to track the corporate motions around ESG that rapidly accelerated during the Pandemic. While the term ESG was first mentioned 15 years ago in the 2006 United Nations Principles for Responsible Investment (PRI) report called “Who Cares Wins,” the perfect storm of moments and movements leading up to and through COVID-19 has catapulted ESG to the main stage of business today – from the social justice (re)uprising of #BlackLivesMatter, to the escalating nature of economic disasters activated by climate change, and to the elevated corporate and personal pursuit for resilience in the persistent aftermath of COVID-19. Never has there been a stronger relationship between long-term corporate strategy, the environment, society, community, and self.
What became clear as I dove into the Berkeley course and read a variety of related books, is that this framework is complex and not yet universally defined. Even tackling just one of the letters E, S or G, requires a commitment to unprecedented corporate strategy and focus on the first gate – defining and embracing Purpose. The purpose of the enterprise is fast evolving (thank goodness) from what was previously aligned to ‘Shareholder Primacy’ – anchored by Milton Friedman’s declaration that social responsibility of business is to increase its profits – to now Stakeholder Capitalism that considers impact on employees, customers, suppliers, and their communities, as well as the stockholders and investors. This refined Purpose has been underscored by the Business Roundtable’s statement 2019, stating that:
“Companies should serve not only their shareholders, but also deliver value to their customer, invest in employees, deal fairly with suppliers and support the communities in which they operate.”
In fact, the Japanese corporate landscape has had this notion for hundreds of years, long preceding the emergence of the ESG acronym in the West. A Japanese document from the Tokugawa period encouraged corporations to think beyond profits, as cited by McKinsey. In the document, the shuchu kiyaku (code of ethics) states that commercial activity should not be conducted for the sole benefit of a business but also for the benefit of society. Hubert Joly, former CEO of Best Buy and lauded universally for his remarkable turnaround of the company, wrote a landmark and powerful book called The Heart of Business: Leadership Principles for the Next Era of Capitalism. In this Wall Street Journal bestseller, Hubert invites us to think deeply about purpose and how to engage all stakeholders in a way that unleashes “human magic” to yield unimagined performance and impact. It’s a timely book for senior business leaders, especially in the post-COVID era. We have much work to do to meaningfully activate the Purpose gene in the corporate DNA.
The second gate is probably the more complex, and more difficult. That is, determining the right metrics to evaluate the outcomes that come out of a strategy aligned to Purpose, and with a standard that can be generally accepted. It’s an exercise that is becoming increasingly popular by investors – an excellent ‘Exhibit A’ being Larry Fink’s 2021 Letter to CEOs – and by businesses determining who they choose as their suppliers and partners. Still, as Professor Jennifer Howard-Grenville elaborates in the Harvard Business Review article ESG Impact is Hard to Measure, but It’s not Impossible:
“…our current focus on ESG measurement is dangerously narrow. It fails to capture the complex, systemic nature of social and environmental systems, and indeed that of business organizations themselves.”
Little wonder that the ability to track and measure ESG outcomes has become a critical asset. Just in July of this year, Blackstone acquired an ESG software and data company called Sphera for $1.4B. Meanwhile, standards groups like EcoVadis and SASB are quickly gaining greater traction with multinational corporations all over the world. Now, we have considerable work to do here as well, as we are not yet at the point of consistent and standardized ways to capture the data and define the metrics – though technology (especially Industry 4.0 and IoT) will help tremendously. Incidentally, this technology dimension is one that I am focusing on more deliberately since joining the New Ventures & Innovation team at NTT this summer.
We are at a dramatic juncture on this journey towards emerging from the Pandemic and recalibrating the ways by which we will thrive – personally and professionally. Thanks to the popularity of ESG and its many dimensions in the C-suite, Boardrooms, and political leadership, I’m excited for how the framework is helping design the roadmap of our collective success…particularly as we help Purpose be authentically embraced by Corporate Enterprise, and metrics/data map to a consistent and comprehensive set of standards. It’s not going to be easy, but for sure it’s going to be exciting and elevate us all to a whole new level of, well, Marie Kondo says it best, “sparking joy” in how we engage as colleagues, as community members, and as increasingly connected human beings living in extraordinary times.
–Rika Nakazawa
Group Vice President, Industry X Co-Innovation, NTT, Ltd.