The world has seen a growing awareness of ESG over the past few years, and Asia is no exception. However, taking China as an example, ESG disclosure is not yet mandatory for A-share listed companies, nor has the local capital market established a standard evaluation system. Still, many companies in China have started developing their ESG strategies and publishing such data and reports.
Despite the fast-growing popularity of ESG, several common misconceptions exist. The concept often suffers from narrow framing when people only view it through the lens of investment, marketing, CSR, or environmental protection. To combat these misconceptions, brands need to remember that effective ESG communications must be founded on three core pillars: corporate goal, business expertise and daily practices.
Why is ESG communications important?
ESG is the acronym for Environment, Social and Governance. Each of these three components comprises several criteria that evaluate companies' environmental friendliness, social responsibility and corporate governance performance.
In addition to traditional financial measurements, ESG is another critical indicator of a company's long-term growth potential. In this sense, ESG not only offers a reference for investors when making investment decisions but also forms an essential basis for regulators and consumers when assessing the compliance and values of companies.
Over the past few years, ESG programs have risen globally. In China, for example, the country's growing attention to ESG can trace back to 2018, when A-shares were officially included in the MSCI Emerging Markets Index, as all listed companies covered by the index are subject to ESG ratings1. In the same year, the China Securities Regulatory Commission revised the "Code of Corporate Governance for Listed Companies", establishing a basic ESG information disclosure framework2. All of these have significantly driven domestic attention to ESG. By the end of June 2021, the number of A-share listed companies that had published ESG reports reached 1,112, up from 371 in 2019, according to the White Paper on ESG Development of China's Listed Companies3 published last year by the China Association for Public Companies and China Securities Index Co., Ltd.
Apart from the capital market, consumers also attach increased importance to ESG. In 2021, IBM surveyed more than 14,000 adults from nine countries to understand public perception of sustainability and social responsibility. Research4 shows that 84% of global consumers consider sustainability important when choosing a brand. Furthermore, 55% said it's very or essential, which marked an increase of 22% over 2019.
Five common misconceptions around ESG communications
Misconception 1: ESG is all about disclosure and only relevant to listed firms
The ESG reports issued by companies, and the ESG ratings from financial institutions are often the most intuitive ways for people to understand one's ESG performance. Then does this mean ESG is only relevant to investors and listed companies? This is a misconception we often see.
When we provide communications consultancy to clients, many SMEs often say that they do not have enough resources to do ESG reports. The logic behind it is a misunderstanding that ESG simply equates to ESG disclosure. While the disclosure is undoubtedly necessary, it is only the final puzzle. ESG means more. It involves a continuous assessment and improvement of all three elements in daily operations.
In other words, companies can execute ESG practices no matter whether they do an ESG report about it. For example, ensuring product safety and quality and protecting employee rights are all considered issues companies of any size must comply with. These legal obligations form an essential part of the ESG indicators. Meeting these legal obligations marks the starting point of one's ESG journey, which can further extend to a wide variety of areas, such as attractive employee welfare packages and improved energy saving. These practices are commonly seen and should be appropriately communicated, with or without a formal ESG report.
Furthermore, consumers are increasingly inclined to purchase from companies that align with their values. As brand values are never established overnight, companies need to act right now to build a trustworthy reputation in every aspect of their operations. This again shows that ESG practices, not ESG reporting, are essential to companies of any size.
Misconception 2: Marketing and creativity outweigh business strategy in ESG communications
Although many brands understand the importance of ESG, sometimes people simply use it as a means of image building without setting a holistic goal at the corporate level. Once, a consumer goods manufacturer asked us to do a campaign on environmental protection, and its brief included no other detail than "please make our campaign creative, help people remember we pay close attention to ESG, " thereby building a positive image for us".
From our point of view, however, environmental protection initiatives can be as big as a group-wide commitment towards carbon neutrality with concrete goals, measurements and timeline or as small as holding a consumer products recycling event. In designing such circumstances, one should first view these initiatives as an integral part of its operations and align closely with its overall business goal instead of relying on incomplete marketing events to build the image. In this sense, event ideas and creativity are the final steps in the decision-making chain.
Misconception 3: ESG is just repackaging CSR
CSR, or Corporate Social Responsibility, has been practised for a long in all sectors. CSR and ESG initiatives aim to promote shared value, which means creating social value for society while pursuing business value for the company. Unfortunately, the similarity of their goal has led to a common misconception that ESG and CSR are the same things.
Strictly speaking, CSR is, in fact, more related to the S (social) component of ESG, but people often broadly generalize it and equate it with ESG as a whole. In most cases, getting too hung up on the wording is unnecessary, but one needs to understand their essential differences. That is, ESG standards require much more quantitative measurements.
While CSR can qualitatively describe one's overall commitment to, say, using more clean energy, ESG must articulate the firm's detailed plan, such as "we plan to reduce our operational carbon footprint by 70% within ten years, and to use 100% green power within three years". Whether you call it CSR or ESG, the key is that one needs to be prepared to evolve from a qualitative to a quantitative framework because the latter lays the foundation if such initiatives are to be systematically integrated with a business.
Misconception 4: ESG is all about environmental protection
As the climate crisis continues, governments worldwide have tightened environmental protection policies in recent years to promote green transformation. For instance, China has said its carbon emissions should peak by 2030 and decline to reach carbon neutrality by 2060. In this context, the E element has often gained more attention than the other two components.
The E element alone cannot support strong ESG performance despite its importance. For example, people tend to think new energy brands should have higher ESG scores under their environmentally friendly products, but this is not the case. An eye-catching example is Tesla5. In 2019, MSCI downgraded Tesla's ESG rating from the next highest AA to A, which it has maintained to date6, which is only at the "average" level for the automotive industry. The MSCI rating dimensions7 show that Tesla leads in areas such as "opportunities in clean tech" and "product carbon footprint", but its poor performance in "product safety and quality" has lowered its overall rating.
In fact, for some sectors, risks related to the S element may be more severe. The technology sector is a typical example. Although the tech industry, in general, has a less negative impact on the environment than other sectors such as petrochemical, its 996 work culture - which derives the name from tech firms' requirement for employees to work from 9 am to 9 pm, six days per week - has caused widespread controversy. If one evaluates ESG on the E element alone, social responsibility and corporate governance neglect will cause serious reputation risks.
Misconception 5: It's sufficient to support the S element via simple activities
A clear definition of the S element is, first and foremost, a key challenge for the ESG standard setting. Whereas "carbon footprint" under E can be measured by the proportion of electricity purchased from renewable resources, and "board diversity" under G can be measured by the ratio of independent directors and female executives, issues under S are often too broad, making it difficult to be measured precisely. From employee wellbeing and product quality to more general social issues such as diversity and inclusion, the S category seems to be a mix of everything. In Standard & Poor's words, social factors are "primarily those that will arise in the relations between a company and people or institutions outside of it8", which, again, is very vague.
The broadness leads to vague definitions, making measuring the S element challenging. Despite the growing importance of S, research9 by BNP Paribas in 2021 shows that 51% of the institutional investors surveyed rated social factors as the most challenging to analyze and integrate, up from 46% in 2019 and 41% in 2017, as data is more challenging to come by. In addition, there is a lack of standardization around social metrics.
Companies often confuse what actions should be taken under the S element. Many deals with it in a simplified manner, such as through charitable donations or doing women empowerment simply by giving female staff a half-day off on International Women's Day.
Three things to keep in mind for effective ESG communications
Setting ESG goals at the corporate level
First, companies need to fully understand that ESG is not just something nice to have as a complementary function that serves for image building. Instead, ESG management should be led from the top, with the relevant issues fully embedded in the company's overall strategic planning.
Taking "consumer privacy and data security" as an example, this is of significant relevance to hotels because they register a large amount of guest information daily. Even so, many hotel brands have not yet integrated this issue into their ESG strategy to the same extent as technology brands. This area is highly specialized because it involves data hierarchy classification, unstructured data handling, access rights, and cyber security regulation. As such, if a hotel says it places importance on information security but has not included any technology expert in its ESG senior management team or put concrete protective measures in place, it leaves people wondering whether the hotel can practise its assurance.
Setting ESG goals at the corporate level requires one to fully understand stakeholders' demands and expectations, such as governments, consumers and investors. On that basis, they identify issues that are most likely to affect their business. Secondly, it is essential to assess one's ESG status throughout its entire value chain, from product/service design and procurement to manufacturing and supply chain management, to see the risks and opportunities in each link. On top of this, a company needs to establish a systematic ESG management framework that defines clear objectives and milestones and maps out the execution process. Finally, it sets a timeline and measurements to ensure things are carried forward orderly.
Utilising one's business expertise in ESG practices
Taking the S element as an example, one crucial joint initiative is poverty alleviation. The needs of disadvantaged groups are multi-faceted; therefore, one should try to bring its strength into play when providing support to build an effective mechanism for the long term. For example, F&B brands can help make better kitchens or purchase unsold agricultural products. In contrast, banks can provide more inclusive loans, and insurers can create tailormade products to prevent poverty-stricken households from losses associated with disasters and illnesses.
A leading artificial intelligence company offers an excellent example of how it has closely combined its business expertise with social value by creating an AI + Mandarin APP. With the help of AI, the APP helps ethnic minorities in Yunnan, Sichuan, Qinghai and Gansu provinces master Mandarin skills, facilitating their daily communications in work and life and ultimately bringing more opportunities to them.
Putting words into action in daily operations
As the old saying goes, "actions speak louder than words". Recently, a renowned consumer brand showed a classic example of how to avoid it. The brand has a "gender equality" section on its website, stating that "research shows 40% of women believe they are misrepresented through some form of stereotype or bias. As one of the world's biggest advertisers, we recognize the need to use our brands as a force for good - raising awareness of and sparking conversation around topics including gender bias and driving for an equal world".
This sounds great, but what about its action? Earlier this year, the brand published a "popular science" article on its WeChat channel to promote its hair and skincare products. The article immediately caused outrage because it says, among other things, that "women's hair is twice as dirty as men's". Unsurprisingly, publicity will backfire if words are not put into action.
Again, while ESG communications vary among different firms and industries, its essence always boils down to these three pillars - corporate goal, business expertise, and daily practices. All angles and creative ideas need to be founded on this basis. Only in this way can one's ESG efforts create a natural, lasting impact.
Olivia Cao is the head of media content at Mars Communications.