ESG was pioneered in the extractive industries, and banking and finance can learn a great deal from their experience, writes Rikard Scoufias of Greece’s national oil and gas exploration and production company HHRM.
As business reopens, the coronavirus pandemic’s impact on environmental, social and corporate governance (ESG) will be significant. In the wake of unprecedented lay-offs, bankruptcies and the prospect of a global recession, the ‘S’, for social, has come to the fore.
This is not just relevant for industries typically associated with a large carbon footprint – banking and finance will also find themselves in the thick of it. ESG isn’t new to these sectors. Nor, however, is it a deeply integrated concept like it is in extractives and energy industries, which pioneered ESG 30 years ago. These industries have learned their lessons the hard way.
Need for innovation
One such lesson is that ESG is too vast and too complex to be captured in generic guidelines and policies. In the months before the outbreak, I met banking and finance executives to discuss how to shape a winning ESG strategy. Many shared frustration with a perceived absence of guidelines and a ‘level playing field’. For heavily regulated sectors such yearnings may be understandable – but they will likely remain unanswered. Those who aspire to ESG leadership will have to innovate their own winning strategy.
A second lesson is that ESG tends to evolve within organisations through a set of stages. By understanding those stages, banking and finance executives shaping ESG strategy can accelerate results and sidestep costly pitfalls or past mistakes.
The first ESG stage is typically born from a desire to ‘do the right thing’, a moral imperative. When the extractive industry globalised into new geographies, the wealth generated too often didn’t contribute to building prosperous societies. Instead, it fomented corruption, civil strife and conflict. Such bitter experiences, coinciding with the unique opportunity to shape a post-ideological world after the collapse of Communism, led visionary leaders like BP’s CEO John Browne in the 1990s to challenge the industry to be a “force for good”. Those first steps laid the foundation for ‘modern’ ESG.
Philanthropic failures
The second stage [of ESG evolution] follows the realisation that a philanthropic approach often fails at execution level. It lacks a natural connect to the business, which also makes it easy prey in times of cost cutting.
Consequently, focus soon pivoted towards the intrinsic concept of the ‘corporate citizen’. ESG shouldn’t focus on doing good in a philanthropic sense, but on business’s responsibilities and contributions to society, their rights and obligations.
This brought a new structure to the debate, but also revealed a frustratingly unbalanced relationship: if business broke the rules, then it was rightly penalised. Yet, if it used the rules to its advantage, say tax planning, the court of public opinion could still penalise it as a bad citizen. Instead of compliance, the proverbial ‘red-face test’ became the litmus for acceptability. It was confusing. Moreover, as companies acquired new soft skills to manage this novel reality, they often failed to integrate them, causing internal friction and misaligned aspirations.
The benefits
What eventually brought things together was today’s third permutation of ESG: the social and environmental license to operate. This risk-based approach dictates that business shall measure all environmental and social impacts against a starting baseline, and mitigate negative impacts back to that baseline. Such mitigation carries cost, of course, but many studies have shown how those are in reality offset against enhanced reputation, market access and avoidance of costly stakeholder conflicts. This approach of self-serving enlightenment has been very successful. It speaks a language that business intuitively understands.
Such lessons from 30 years of ESG experience in the extractives and energy industries can be immensely valuable to those who are today seeking to shape their own strategy. It is therefore ironic that some notable banking and finance institutions appear to offer an ESG strategy of little more substance than stumbling over each other to trumpet their intent to give energy and extractive companies the cold shoulder. Such moves may generate publicity blips, but a long-term ESG strategy cannot be centred on what you will not do.
The future ESG leaders in banking and finance will be those that resist temptations of virtue-signalling and instead pick up the gauntlet of meaningful engagement with the corporate world, including in energy, mining and infrastructure, to seize on past lessons – and to constructively leverage the immense influence they wield to act as a driving force for long-term and sustainable transition.
Rikard Scoufias is non-executive chairman of Greece’s national oil and gas exploration and production company HHRM and was the Trans Adriatic Pipeline’s country manager for Greece between 2011 and 2018.
