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Article 18 Nov 2020

Reputation as a pillar of corporate transformation

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The new reality in the business world increasingly involves embracing a concept that has gained enormous traction in recent times: Best practices in Environmental, Social, and Governance (ESG). This vision helps determine how companies and investments impact society and the world. More than just a decisive factor for making investment decisions in companies or countries, ESG reflects the complete interpenetration of positioning, action, and reputation.

The importance of ESG practices has been gaining ground as a result of demands made on institutional investors, financial institutions, pension plans, mutual funds, and endowments. It is also becoming a general and growing concern for other stakeholders in the companies. The pandemic and recent social conflicts around the world will help speed up these shifts, amplifying the debate on sustainable and social development.

Before the global COVID-19 crisis, responsible capitalism had already been a subject of growing interest in society. Since 2019, strong measures have been taken in this transformation. One of them was the Business Roundtable’s Statement on the Purpose of a Corporation, which pointed to the urgent need for management to be geared to all stakeholders. The Roundtable is an organization representing the CEOs of major U.S. companies. In 2020, this ESG vision was highlighted in the debates at the Davos Economic Forum. It was also echoed in emblematic business initiatives, such as when BlackRock, the largest asset manager in the world, announced that it would give priority to responsible and sustainable investments in the US$7 trillion of assets it manages. “Awareness is rapidly changing, and I believe we are on the edge of a fundamental restructuring,” announced Larry Fink, CEO and president of the board of BlackRock, in his annual letter to CEOs.

Now, with the lethargy induced by the pandemic, pressure for a stronger connection between the purposes of the corporate sector, the financial world, and society have grown even more. The global Stop Hate for Profit initiative transferred the pressure to Facebook, which had to deal with a boycott of hundreds of large advertisers that accused it of promoting the spread of hate speech and offensive content. Social media was also a means of pressure used by the Sleeping Giants movement, which denounces brands and forces them to cancel ad placements on sites identified as spreading fake news and radical messages.

“Now, with the lethargy induced by the pandemic, pressure for a stronger connection between the purposes of the corporate sector, the financial world, and society have grown even more”

In the environmental field, the power of this ESG transformation has focused not only on companies, but also entire industries and countries. Brazil is a clear example of this. Brazilian companies whose commitment to environmental preservation is in doubt are being excluded from the investment decisions of several international funds.

The pressure is also on the government itself. With the leadership of the Investor Initiative for Sustainable Forests, international investment funds that manage almost US$4 trillion have started to put pressure on the Jair Bolsonaro government to take more effective measures against deforestation, warning of the growing “systemic risk” to investments. A group of leaders from large Brazilian companies have also issued a national statement calling on the post-pandemic economic recovery to take a low-carbon path.

As a result, it is hardly an exaggeration to say that fires in green areas also destroy reputations – and not only in Brazil. The Amazon rainforest extends over more than eight countries in South America, which have repeatedly been asked to demonstrate their commitment to sustainable development regarding issues such as combating deforestation, protecting biodiversity, and including local and indigenous communities.

“The pressure is also on the government itself. With the leadership of the Investor Initiative for Sustainable Forests, international investment funds have started to put pressure on the Jair Bolsonaro government to take more effective measures against deforestation”

A new scenario of opportunities

 

There are opportunities for companies and countries attuned to the new reality. Among them is the possibility of attracting funds from the international market by issuing Green Bonds. This alternative form of finance has already been used in the market by more than 50 countries and supra-national institutions.

The transformation to the “new ESG world” is clearly driven by the private sector, but it is not only the reflection of an altruistic conscience. As Fink said, for BlackRock, “climate risk is investment risk.”

There are examples showing that a number of investors are no longer content to interact with companies that limit themselves solely to corporate compliance. As ESG evolves, “impact investing” is gaining ground. Its aim is to generate financial returns allied with positive and specific contributions to the environment and society.

The concern over environmental, social, and governance aspects has drawn the attention of consultancies and law firms, which are creating task forces to guide their clients. These are supported by professionals from a variety of specialties, such as capital markets, M&A, taxation, banking, finance, compliance, and employment to guide their clients.

The involvement of numerous specialists in these projects is explained by the fact that the scope of ESG is quite broad. It ranges from policies on waste management and natural resources to integrity, compliance, better alignment for management compensation, and diversity and inclusion initiatives. For this reason, a more colorful comparison makes increasing sense: In the ESG context, it is no longer enough that companies be “green;” they must have diverse colors and be concerned with all the other urgent matters of society.

“The transformation to the “new ESG world” is clearly driven by the private sector, but it is not only the reflection of an altruistic conscience”

The weight of reputation

 

The communications perspective cannot be absent from the role played by specialties that support company transformation. Reputation is no longer just a desirable attribute; it has become an essential condition for allocating resources in the financial world. The premise of ESG is to “walk the talk:” To generate specific actions and not just discourse. It means creating a real story and explaining what we are constructing. Investors want to “separate the wheat from the chaff” to decide where to direct their resources. Professionals want to work in companies they admire. In short, there is a whole universe of stakeholders who want to know who they are dealing with. And business reputation is the tool for this natural selection process.

In this situation, lack of transparency is one of the main threats to credibility. Another risk is the question of materiality; in other words, the relevance and importance of specific criteria (environmental, social, or governance) for each company, depending on its activity and sector. If ESG factors are not constructed coherently, distrust may arise surrounding what has been called “greenwashing” or “socialwashing.” These are attempts at improving corporate image by overvaluing initiatives or even stressing an aspect of ESG that does not have much weight within the business. The environmental question, for example, is of greater importance among industry or agribusiness than service companies. Each company needs to adopt (and describe) actions that are important in its specific case.

Thus, in the case of green bonds, regulatory bodies such as the Securities and Exchange Commission (SEC) have already begun to limit the framework to prevent greenwashing when issuing securities that may not have a significant impact on society or are geared to projects other than those promised.

Communicating ESG attributes is a reflection of the attitude of commitment and corporate responsibility. It must be constructed on the pillars of transparency and honesty. It must be accessible and assertive.

And it must also be diverse, in the sense of establishing relationships with and demonstrating storydoing for all the publics in line with the Business Roundtable statement’s logic (with a focus on stakeholders). When we say communication should be connected to diversity, it presupposes that it must also be flexible and adapted to each of these publics. A didactic, emotional, and multimedia approach must be constructed for dialogue with diverse groups. A more technical and systematized approach for an investor or regulatory public, for example.

Companies can no longer justify themselves by issuing sustainability reports or narrating diversity actions on their corporate websites. Communication goes much further. It must be multi-directional. Listen to what stakeholders want, then establish and foster specific relationships.

We are faced with a real “ESG transformation” among companies, involving paradigm shifts and references. It can only be established through solid and truthful reputation development. Communication, at the service of reputation, will also reflect the new situation. Playing an increasingly decisive role, it will become truly ESG communication.

“Communicating ESG attributes is a reflection of the attitude of commitment and corporate responsibility. It must be constructed on the pillars of transparency and honesty. It must be accessible and assertive”

ESG IN THE REPUTATIONAL DIMENSION

The impact of the three aspects of ESG (environmental, social, and governance) can be understood and visualized if we think of the dimensions of reputation.

The reputational dimension is supported by expectations: Aspirational (the image projected by the organization); Pragmatic (whether it delivers well on what it sells; in other words whether it has credibility); Relational (how it connects with people); Ethical (its values); and Social (its contribution to society).

The concept of ESG shows how the environmental, social, and governance requirements align with the dimensions of credibility, transparency, integrity, and contribution. But the cycle is only completed if the organization also takes care of its image so it aligns with the aspirational expectations of its stakeholders.

Doing things well and correctly means understanding and meeting stakeholder expectations. In the case of aligning with ESG criteria, reputation is not a consequence, but one of the pillars of sustainability for a responsible business. Positioning comes from assertive and constructive action.

Cleber Martins
Partner and Managing Director at LLYC Brazil
A journalist and lawyer with extensive experience in the Brazilian communication sector, he held positions at the Folha de S. Paulo newspaper for 15 years, including Business Editor and Assistant Economic Affairs Editor. He trained at the University of São Paulo (USP) and also holds an MBA in Economic-Financial Information and an extension in Political Science and Governmental Relations.

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