Milton Friedman’s hypothesis that “the social responsibility of business is to increase profit” has been under attack almost since the day it was written, over 50 years ago, and yet it remains common cause among most businesses and investors that almost all measures of value are at their core profit-related.
Our current times are particularly pertinent as we reconsider Friedman’s statement and look to understand the array of expectations that both shareholders and stakeholders, in general, have of a business.
These expectations coalesce into pressures put onto firms to firstly, increase economic value and contributions made to society, secondly to limit and reverse the environmental impacts of their footprint and to unlock the potential of nature-based assets and solutions, thirdly to improve social development and inclusion, and finally to focus on good governance, improve capability across stakeholder boundaries and to rebuild trust.
In the face of these mounting and shifting expectations corporations and industries have never been more concerned with appearing to be socially responsible. Socially responsible investing has grown in leaps and bounds, and several studies have shown that companies that perform better in ESG (Environment, Social, and Governance) metrics tend to perform better on stock markets as well.
We stand at the crossroads though. The task facing leaders is how to integrate their commercial and operational objectives with the fluidity of the ESG expectations placed upon their business. This then invariably opens up the question of what the purpose of the organisation is and how then the intent to be responsible matches the needs of both the business and stakeholders.
The additional complication at this crossroads is the evident multiplicity of frameworks to measure ESG and responsible actions, which are then in many cases decoupled from profits. Also, most frameworks have an industry-directed focus, and so over the next 5-10 years, we will see multiple iterations arise and fall. There is a challenge as well for investors and individuals in being able to compare apples to apples as the different frameworks present subtly nuanced differences which are difficult to separate/compare.
It is not uncommon to hear company executives, investors, and regulators highlight the lack of quality in published ESG data. While many companies are working to improve their data and related analytics, and a whole new industry of advisers, auditors, and analytic experts have emerged to assist in these efforts, progress and true visibility will be limited until we agree on common meaningful standards and build trust in how data is reported. Without common standards, even high-quality data will result in comparing apples with oranges.
“The ‘financial decision’ has gained increasing weight in companies as the calculation and data-gathering techniques have improved. As long as everything can be counted and trends can be projected, any decision can be treated in this way. Again, this has come to be accepted as the rational way to make decisions. It solves one major problem lurking in many firms: that of communication. Functional managers do not speak the same language. The everyday operating realities of sales, manufacturing, HR, and R&D environments are very different. Each area will have its own dialect and customs, judgements and values. As a consequence, a common language is needed to communicate across functions, and since everybody has to deal with budgets and is accountable for results, mostly in ‘profit’ terms, money is often chosen.” (Balle, 1994)
This statement, from more than a quarter-century ago, remains as valid and problematic today as it was then. Large organisations and industries continue to struggle with different languages, different frameworks, and different value systems. The proliferation of new standards and methods does not make this any easier.
The World Economic Forum (WEF) has recognised that the metrics and models that do exist in the ESG space as standards today are backward-looking, and as a result, only really tell part of the story. (Granat, 2020).
What is needed is a meta-language, a framework that can be structurally linked to all other frameworks, a Rosetta stone of value. Having an interlocutor unifying framework provides systems and organisations alignment and comparison opportunities without needing to redo underlying reporting mechanisms.
It is in this space that the Sustainable Development Goals have a powerful role to play for business.
About the Sustainable Development Goals
The Sustainable Development Goals (SDGs), also known as the Global Goals, were adopted by United Nations Member States in 2015 as a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030. (UNDP, n.d.)
There are 17 Goals, which between them have 169 targets and 230 indicators of progress. While the Goals are aspirational for all countries, organisations, and even individuals, the targets and indicators are specifically focused on government action at national levels.
Governments cannot deliver on the SDGs alone and so every societal role player has a key role to play, especially business, in establishing a sustainable socio-economic model for the future. The role of business has been further amplified by the shock that COVID-19 wrought on low to middle-income countries where social and economic fault lines were prised open further by the pandemic. The business had the opportunity to step up, even more, to increase its role alongside the government to support communities. This in turn has improved perceptions of trust in business and the private sector (Edelman, 2020).
The translation of the SDGs to business is however not an exact science as yet. Initial efforts by a business at linking their corporate citizenship activities to SDGs in annual reports have resulted in claims of ‘rainbow washing’ where these linkages do not seem substantial enough to convince stakeholders of their real impact. There are however encouraging movements from both within the UN and in business circles to produce frameworks for the effective translation of the SDGs to business metrics.
The SDGs are highly integrated, recognising that any actions impact multiple goals whether positively or negatively, and that development needs to achieve a balance between social, environmental, institutional, and economic sustainability. This integration is imperative in developing a whole value mindset and perspective – that only with stability and equity in all areas does a sustainable future become possible.
Headline reasons how, unlike other frameworks, the SDGs give a common language across business functions and stakeholders. The SDGs are:
Using the Goals in a business
As mentioned above, the goals are focused on a sustainable world, one in which all humans can live with dignity and hope and without destroying the means for continued existence. At a target level though, the specifics are not always directly pertinent to the business, and so the growing movement of “putting stickers on” in financial or integrated reports, in which organisations reference the SDGs and attach case studies, is an ultimately facile or at the best partial effort.
Where the goals and targets do have a very powerful role to play is as a unifying framework for value. The SDGs cover exceptionally well the multiple aspects which are asked of modern business – their impact on society, their impact on the environment, and their financial wellbeing. The goals also include the imperative aspect of focusing on peace, justice, governance, institutional capability, and partnerships to support all the Goals.
This is represented in the sequential orders of the SDGs into the 5 P’s:
All businesses interact with the scope of the SDGs in some manner, and so extant reporting methods need not necessarily be changed. Internally, the SDGs cut across multiple levels of activity, that when used to understand the business footprint includes what is being done to intentionally improve outcomes in:
About DBK Advisory
DBK has a proven methodology that recouples the E (economic imperative) with the mainstreaming of ESG (Environmental, Social, Governance) - we call this Unified value. We use the combination of data, strategic alignment, and a compelling, defensible narrative to help you to show your stakeholders the full range of value that your organisation is adding to society and the environment.
We have worked with numerous large listed companies and industry associations across multiple industries, and our methodology is suited to large and complex organisations.