From our experience at the Tata Group, there are four important drivers of success in implementing an ESG agenda. First, the tone at the top—getting those at the top, including the board directors and senior management, to lend their support to an ESG strategy helmed by identified leaders and transparently communicate their sustainability concerns at every possible occasion. Second, investing in the people in the organization—giving them confidence that they are integral to the organization’s core purpose and that they matter to the future of the business. Third, walking the talk and demonstrating through actions that the organization is truly committed to ESG values. Fourth, putting in place appropriate systems and processes, including a code of conduct and a measurement system, to monitor progress on ESG.
Underlying all this is what an organization sees as its corporate purpose or reason for existence. As a white paper put out by the International Business Council of the World Economic Forum puts it, ‘Oversight of a company’s chosen priorities in terms of economic, environmental and social issues requires a clear understanding and articulation of the firm’s purpose. The more that firms can link their purpose and core business, the better they can deliver long-term value for all stakeholders, including shareholders.’
Reflecting on the importance of corporate purpose in his 2019 letter to CEOs, Larry Fink—the head of the world’s largest money manager, BlackRock—underlined the fact that ‘profits and purpose are inextricably linked’:
“Profits are essential if a company is to effectively serve all of its stakeholders over time—not only shareholders but also employees, customers and communities. Similarly, when a company truly understands and expresses its purpose, it functions with the focus and strategic discipline that drive long-term profitability. Purpose unifies management, employees and communities. It drives ethical behaviour and creates an essential check on actions that go against the best interests of stakeholders. Purpose guides culture, provides a framework for consistent decision-making and, ultimately, helps sustain long-term financial returns for the shareholders of your company.”
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We firmly believe that for a business to successfully embrace the new and evolving ESG agenda, it must be able to first define its mission or core purpose. As Mahatma Gandhi said, ‘Find purpose, and the means will follow.’ The Tata Group, where we spent many years, defines its corporate purpose as follows: ‘To improve the quality of life of the communities we serve, through long-term stakeholder value creation, based on leadership with trust.’ This was inspired by the belief of its founder Jamsetji Tata that ‘in a free enterprise, the community is not just another stakeholder in business, but in fact the very purpose of its existence’.
We can vouch for the fact that this has played an incredibly important role in sustaining the Group’s powerful brand equity for over 150 years. Likewise, Michael Porter et al. cite the example of Discovery, a South Africa-based life and health insurance company that has the stated purpose of making people healthier. At first glance, this might seem counter-intuitive—after all, an insurance company’s business benefits when subscribers seek out its products as a hedge against their possible ill-health. But instead of linking its purpose to developing more sophisticated and relevant insurance products, Discovery chose to focus on actually improving the health of its subscribers. The company translated its purpose into its strategy and operations by integrating into its health insurance product a powerful set of economic incentives for customers to engage in healthier behaviours. These incentives influence behaviours in ways that actually reduce healthcare costs and increase life expectancy.
As a result, Discovery is able to offer its insurance products at lower premia while sustaining superior profitability tied directly to the social impact created by delivering on its purpose. All employees at Discovery understand the centrality of the company’s purpose to their jobs, which has meant continuing innovation to make this competitive advantage greater. The social impact Discovery creates—improving health—is central to its strategic positioning and creates shared value for both society and its shareholders.
As McKinsey analysts Arne Gast et al. put it, ‘The change in stance that elevates stakeholder interests to the same level as shareholders’ interests reflects a reappraisal of purpose. […] Purpose must shape corporate strategy, inspire employees, engage customers and communities and be fully embedded in the culture.’
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Even in the absence of a clearly defined corporate purpose, many companies try to at least demonstrate their commitment to a principles-based approach of doing business. Perhaps the best-recognised way of doing this is by embracing the UN Global Compact. The Global Compact outlines responsibilities in the areas of human rights, labour, environment and anti-corruption. Its ten principles are derived from the Universal Declaration of Human Rights, the International Labour Organization’s (ILO) Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development and the United Nations Convention against Corruption.
Indian businesses, we believe, have a particularly useful tool to help them build greater alignment within their organizations around a set of shared ESG-focussed values. This is the CSR spending requirement that all profitable companies meeting a size-and-scale test have been obliged to undertake in India for the past few years.
This CSR spending is to be monitored by a committee of the board of directors, which includes an independent director in the case of listed entities. This scrutiny is elevating the discourse on CSR. Earlier, CSR spending used to be something undertaken ‘beyond business’ if and when Indian companies had the money and inclination. Now, it is a matter of considerable debate and discussion amongst board directors, with a focus on the efficiency of spending and the outcomes delivered. In addition, in the more forward-looking Indian companies, we have seen the mandate of the CSR committee expand to include the larger subject of sustainability.
An organisation’s CSR spending can be used to increase the connect of its people, from the board downwards, with the local community and with social causes that matter to them. This increases employee pride and engagement levels within the organization. Enterprises like Tata, Maruti Suzuki, Godrej and Wipro have linked CSR spending with their corporate volunteering programmes; this allows employees to directly support non-profits and social causes by contributing their time and talent, which may be deployed in activities as diverse as writing software for management information systems for hospitals, devising marketing campaigns for non-profits or organizing fundraisers. The connection that the members of the organisation have with its corporate purpose, constructed around a set of shared ESG-focussed values, thus gets reinforced.
This excerpt from Outlast by Dr Mukund Rajan and Col. Rajeev Kumar has been published with permission from HarperCollins.