Making ESG Count in Reputation Management

It might seem an oxymoron that the world’s most admired company can have an image problem. But the backlash that hit Apple in 2010 after a spate of worker suicides at its outsourced assembly plant in Shenzhen, underscored that reputation is now much more than just great products and profits. Ethical behaviour increasingly matters, especially when millions of consumers on social media are ready to be judge and jury.

Environmental, Social and Governance (ESG) risks have now become mainstream, such is their increasing materiality. Today, companies face investor scrutiny on not just how they perform financially, but with stakeholders groups that include employees, suppliers, customers, NGOs, regulators, and the wider community. In Asia employee unrest and tightening environmental standards are emerging as two of the biggest flashpoints.

Already this year in Hong Kong, a 40-day strike by dockers put local hong Hutchison Whampoa under the uncomfortable glare of global media as labour conditions in its outsourced supply chain were examined.

In China it feels like every week brings a new food safety or environmental scandal. Even highly regarded international brands should not be complacent.

A surprise this year was that Kentucky Fried Chicken owned by Yum! Brands – and China’s largest fast-food chain – became a casualty after excessive antibiotics were found in its locally sourced chicken. Colonel Sander’s bad luck was then compounded by bird flu. Same store sales collapsed 29% in April from a year earlier.

These cases only go to show the importance of ESG issues for businesses and their reputation.

A report signed off by the auditor is no longer enough: investors need to be sure a potential reputation time bomb or worse is not hidden in a far-flung supply chain.

Unfortunately Asia has generally been behind the curve on ESG because governments have not prioritized developing robust regulatory environments to address corporate behaviour. Consequently, ESG reporting tends to be a mixed bag – ranging from the very good to none at all.

But there are signs of change. The Hong Kong Stock Exchange introduced its own voluntary ESG regime last year, which will be elevated to “comply or explain” by 2015.

Companies are advised not to wait for regulators to catch-up, however.

For one, digitally literate stakeholders from customers to NGOs are already holding companies to account. Investors are also setting their own pace, using ESG screening to limit reputational and headline risk, as well as to improve returns.

Already we are seeing prospective PE investments being subject not just to financial due diligence, but also ESG and reputation audits. Investors want to see companies are managing their ESG risks, both as a preventative measure and also to enhance value creation and reputation.

Failure to address these issues could even mean companies being shut out of access to capital markets. Looking forward, already we are starting to see investors and exchanges moving towards including ESG compliance in listing guidelines.

To make ESG count in reputation management requires making a much wider appraisal of business risks. At a minimum this means formulating policy on procurement, labour standards, along with environmental goals. This provides the bedrock for any communication strategy.

If leading companies of the future want to secure capital and customer loyalty, they need to be genuinely committed to best practice and communicating it to all stakeholders. In essence this means using ESG to demonstrate they are outwardly fit for business.

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