Environmental, Social and Governance (ESG) goals are no longer a nice to have for Australian businesses. ESG initiatives have quickly become strategic imperatives for many companies and critical differentiators for many businesses looking to gain a competitive advantage in the marketplace, build brand loyalty, and attract and retain talent within their organisation.
Bernadette Bulacan, Lead Evangelist at contract intelligence company Icertis explores ESG as the foundation for business trust.
The drive towards ESG is in part driven by demand from consumers. The ‘No Planet B Global Study’ released in April 2022, found that 63% of Australians would be willing to cancel their relationship with a brand that does not take sustainability and social initiatives seriously. In addition, more than three-quarters of Aussie respondents have made clear they are willing to pay a premium for products and services from businesses that can clearly demonstrate their progress on environmental and social issues. Roughly the same number of people responded that they would rather work for and invest in these companies.
Paying lip service to ESG is not enough
But paying lip service to ESG is not enough. The study also found that 85% of Australian consumers now want companies to demonstrate action and proof of progress. Businesses need to be reporting on ESG to demonstrate their commitment and build trust with consumers.
Findings from the Building Trust in Business Relationships Economist Impact report, and sponsored by Icertis, show that executives believe that high levels of trust between businesses can also be beneficial to long-term revenue growth and achieve sustainability goals. Broad-based ESG reporting remains voluntary in Australia currently, however Australian companies are expected to come under greater pressure from major investors, including Australian super funds, to move towards global standard reporting of ESG issues. As ESG reporting becomes more central to a growing number of companies, ESG compliance will help generate trust between businesses while simultaneously building customer loyalty. As a result, we’re seeing ASX-listed businesses such as Vulcan Energy, Global Energy Ventures and Latin Resources begin reporting already.
Most survey respondents see the visibility and transparency of supply chains as means to achieving sustainability targets and building trust in business partners.
But, as the study revealed, there remain gaps between the steps executives see as enhancing trustworthy business relationships and the efforts their organisation has taken. Areas like expanding the number of dedicated ESG compliance staff or investments in new technology that enables the fulfilment of contractual obligations lag expectations overall.
How ESG can drive trust in business relationships
Companies build trusted business relationships primarily due to their beneficial effects in achieving financial success. But, alongside financial success, companies are increasingly discovering that promoting trust in their relationships can be beneficial for achieving sustainability goals as well.
The Economist Impact report highlights a growing consensus amongst those surveyed that trust built through meeting pre-agreed goals, such as sustainability targets, leads to an organisation’s overall “market competitiveness, raises productivity, aids the recruitment and retention of talent, and, ultimately, secures long-term revenue growth.”
Indeed, 36% of executives surveyed for the Economist Impact report said that the boost to sustainability goals was one of the most significant benefits of high trust levels in business relationships, particularly related to internal company performance.
The growing demand for ESG compliance
While ESG is a newer business performance metric, 73% of surveyed executives said demonstrating their corporate ESG commitments was a “high or business-critical priority” for their organisation’s senior leadership. More than three-quarters of those surveyed (76%) said that ESG reporting had grown in importance over the previous two years.
Likewise, almost half (47%) of the respondents said that their organisation had identified investing in or developing their ESG commitments in 2022-24, rivalling the strategic importance of cybersecurity (49%) and digital transformation (48%) in their planning.
Shareholder and business partner pressure in favour of ESG goals is also growing. Respondents said that investors or shareholders (37%) and partners (34%) are increasingly pushing for progress on ESG commitments.
Combined with pressure from senior leadership, this growth of ESG importance for business leaders is due to pressure from below, as well. The Economist Impact report found that 74% of executives feel consumers and customers increasingly demand that organisations hold ESG principles and act upon them in meaningful ways.
An expert on trust in business, Natalie Doyle Oldfield, told Economist Impact that organisations face “greater scrutiny from a more informed and critical customer than ever before…They want to see a social conscience.”
Customers will reward trust with loyalty. An Edelman study found more than 80% of respondents indicated trust in a company was a significant factor in purchasing decisions, and 60% would remain loyal to a trusted company even if a competitor launched. With only a third of consumers reporting they trusted the companies they bought from and less than 30% willing to remain loyal to a manufacturer they didn’t trust, there is a clear advantage in being a company buyers can trust.
Organisational Management and ESG Reporting
The Economist Impact report highlights organisational management as a critical factor in building and maintaining trust.
Of business leaders surveyed, 89% believed it was important that their partners shared their organisation’s values, and nearly 40% had included their business partners in their long-term planning.
A 2021 study found that firms not only establish supply-chain relationships with like-minded companies “inclined to engage” in responsible social and environmental behaviours, but suppliers are often forced to improve their ESG conduct based on pressure from buyers. The researchers discovered that a “one-standard-deviation change in the customer CSR [corporate social responsibility]rating will generate about an 8% aggregate increase in [the]future CSR performance of [its]suppliers.”
These findings aligned with survey results in the Economist Impact report, with respondents identifying their business partners as “the group most likely to drive improvements in both supply-chain visibility and transparency.”
Where companies can do more
When it comes to ESG compliance, the Economist Impact report respondents felt that they were doing well overall.
Nearly 60% said they outperformed peers on ESG strategy, with two-thirds (64%) feeling they were ahead of competitors on supply-chain visibility and transparency.
When it comes to implementation, however, the study found disconnects.
Seventy-five percent of respondents recommended employing dedicated ESG compliance staff, yet only 15% did so. Similarly, 72% of respondents recommended adopting new technology to track progress or enable reporting processes, yet only 22% had done so. More significantly, 70% of respondents believed in aligning ESG goals with overall business strategy, but only 43% had taken such steps.
Similarly, business executives have yet to harness the power of their contracts to build and maintain trust, especially around ESG reporting. Just a third of respondents had embedded ESG obligations into partner contracts, and only 5% had terminated a contract based on misalignment with ESG goals by a partner.
With ESG compliance becoming a more critical element of business today, companies must do more to cultivate how partners and customers alike perceive their brand’s trustworthiness and commitment to ESG goals and ideals.
Improving the visibility and transparency of supply chains, embedding ESG requirements into partner contracts, and hiring dedicated ESG compliance staff will boost partner and consumer trust in a company, provided that deeds follow words. The gaps illuminated by the Economist Impact report where implementation is concerned need to be addressed. By doing so, companies that are seen to walk the walk will be able to successfully build customer loyalty while at the same time fostering trusting business relationships, both of which will ultimately serve to bolster the bottom line.
To read the full Economist Impact report, click here.
Read why businesses need to build trust.