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Markkula Center for Applied Ethics

What do ESG and Ethics Have in Common?

ESG Minisite Environmental Ethics

ESG Minisite Environmental Ethics

Ann Skeet

Ann Skeet is the senior director of Leadership Ethics at the Markkula Center for Applied Ethics at Santa Clara University. Views are her own.

Ethics captures the conditions in which human beings thrive and that provides the most direct link to the modern business taxonomy, ESG, shorthand for environmental, social and governance standards in corporations. These standards hone in on conditions that support human well-being and orient companies to the ways they impact and are impacted by society. The introduction of these metrics signals a renewed value on ethics, reflected in the marketplace by consumers and employees. Indeed, the courage of people serving currently in board and management roles has led them “to set goals to be realized over the long term, to serve interests beyond just those of financial investors, and to actively design the larger business system they operate within to promote ethical behavior, considering a broader set of stakeholders.1

Leadership ethics focuses on the ethical dilemmas faced by leaders and followers in organizational settings and most such dilemmas, though not all, fall into one of these three categories. By highlighting followers’ interests in ethics, be they employees or consumers, today’s business leaders need to consider multi-stakeholder perspectives.  

Environmental standards have been evolving over the last several decades through a number of global convenings and as expressed in goals from global entities, such as the 17 Sustainable Development Goals of the United Nations.  Companies have moved from activities such as building environmentally friendly workplaces that are Leeds certified, to setting goals for achieving zero carbon emissions. As we prepare for 2022, reporting standards, environmentally friendly investing options, and responsibly sourced supply chains are all part of the sustainability scorecards companies have begun to keep and report.  

Social standards, of the three measurement sets, have received significant media attention in the four years since the #Metoo movement began and since the murder of George Floyd. Harassment free workplaces, matters of social justice, and the need to account for political polarity while also taking a corporate position on social matters is all relatively new terrain for many of today’s corporate executives. 

Governance standards are articulated in current laws, but the compliance with those regulations and laws is uneven. Thus, more corporations are taking a more holistic approach, describing good governance in terms that embrace both ethical and legal aims, considering the role that culture plays in creating healthy workplace environments and the role governance plays in culture formation and leadership. 

Awareness of local laws and norms is heightened in today’s marketplace, as more companies make choices about where to do their work based on alignment with corporate values. In this very critical way, ethics is shaping business decisions at all levels.

We know inresearch from the Markkula Center for Applied Ethics that three conditions in corporations lead to the use of ethical decision making:2  

By committing to ESG measures, corporations, regulators and lawmakers are activating these conditions. They acknowledge that companies both affect society and are, in turn, affected by it. They allow for a shared understanding of ethical behavior in ways that will allow for individual moral decision making consistent with corporate values. And they drive companies towards ethical decision making practices in policy formulation and product development by emphasizing data, engaging constituents in identifying what is important to them, and taking a longer term, more patient approach to managing change.

Further, we know that ESG measures capture the six major ethical lenses we identify and work with at our Ethics Center. Let’s start with governance. The definition for governance I find most useful is that it is generative dialogue.3  The ability of people to think together creating new approaches and decision making uses the lenses of rights, the common good, justice, and care ethics. Governing often involves adjudicating between the competing rights of individuals or constituencies. Fairly distributing benefits and burdens is often part of the work and the relationships an organization has with employees, consumers, other companies, the environment and community are all part of governing. Boards and management teams are regularly involved in the kinds of cost-benefit analyses that utilitarianism brings us to. Decisions are made to reflect both the virtues of an organization and the people leading it. In brief, governance is all about ethics.

The issues being worked through in the social realm also draw on most ethical lenses. The #MeToo and Black Lives Matters movements seek justice for people wronged in work and market places and elevate their rights as humans. Institutions are able to tie a direct line to the costs of harms that have been endured by minorities and marginalized populations in both realms for far too long. Employees are now demanding that their companies care about values. No longer can people responsible for organizations look the other way when a star performer errs socially.  To be able to act decisively and expeditiously, companies need to define and use their values in the course of doing business regularly to achieve the kind of mission integrity now considered table stakes by today’s workforce.

ESG exemplifies the practice of ethical leadership

To effectively introduce ESG measures, organizations can apply a practice of ethical leadership, which includes both elements of “being” and “doing.”  Boards and c-suite executives can model the virtues they want to activate in their employees around sustainability, social norms, and the means of arriving at decisions and providing oversight.  

Since the measures span three topical areas, some of which have further subsets within them, companies can forge community by gathering employees who have both functional responsibilities in those areas, but also those that hold personal interest in them. This is the premise of most employee resource groups (ERGs) or affinity groups.  Leaders can thoughtfully opt for narratives that reinforce the organization’s commitments in all three areas and deepen the connection to that commitment by linking the corporation’s values and principles to ESG metrics. By first asking if there are corporate values that support each area, companies might be able to identify where they need to build common values to support achieving ESG goals.

A number of organizations are moving to establish benchmarks, investments funds, and other means of pointing towards ethical conduct for environment, social, and governance activities. By providing a positive frame of expected behavior, organizations orient employees to a common set of goals and provide a signal to consumers about how decisions in the company are made.

Effectively tying ESG goals to the interests of the customers served by the company is one way to be sure that those affected by decisions are shaping them.  Some companies have very mature methodologies for doing this, such as Microsoft’s Community Jury.4

The metrics themselves can become one way that companies reset culture when things go wrong. Most companies work with unique mission statements, values and/or principles.  Combining those with ESG goals allows companies to identify common ground with broader societal needs and to determine how to implement the “right thing.”5

The evolution of ESG metrics is perhaps one of the best examples of ethical systems design.  This kind of effort is generally undertaken by leaders with capacity to consider means of shaping their industry or sector beyond their own organization. They contribute to principles and standards in their industry or other relevant ecosystems.6 ESG thus becomes a system of ethics measurement.

ESG applies the wisdom of the ages

In a recent dialogue with a Markkula Center business and leadership advisory council, we synthesized a set of principles found in the traditions of native peoples.  At the time, we were anticipating the first federal declaration of Indigenous People’s Day.  These are the ethics of those traditions that we identified7:

For ESG measures to have surfaced as a common business nomenclature, people have to fundamentally buy into these principles. To redirect human behavior to sustain our environment and practice social justice requires the application of this wisdom.  Both the time horizon and the responsibility of ensuring a decision’s sustainability over many generations are necessary components of best corporate ESG practices. In this way, ESG measures, though considered fresh and new, are actually drawing on time-tested, long standing principles that have guided humans in their relationships with each other and the planet Earth for many centuries. 

By co-creating standards with competitors, regulators, and lawmakers, business executives are showing that ethics is a vital part of business purpose. In very tangible ways, today’s executives are putting into practice the idea business exists to optimize collective value. This is the finding by two retiring business ethics scholars identified in a body of research that capped their respective careers at the University of Pennsylvania.  Professors Donaldson and Walsh asked participants to complete the following analogy:  “Law is to justice as medicine is to health as business is to ________.8  The term they arrived at was optimized collective value. This is a concept that has been around for many generations as well.  We know it most familiarly as the common good.

 

References

1Skeet, Market Forces, 2016

2Cecilia Martinez, Ann Gregg Skeet, Pedro M. Sasia. “Managing organizational ethics: How ethics becomes pervasive within organizations.”  Business Horizons, October 21, 2020, found at doi:10.1016/j.bushor.2020.09.008

3Chait, Richard P.; Ryan, William P.; Taylor, Barbara E. (2011). Governance as Leadership. Hoboken, NJ: Wiley.

4"Responsible Use of Technology: The Microsoft Case Study", World Economic Forum, February, 2021.

5Gentile, M. C. (2012). Giving voice to values. Yale University Press.

6Skeet, The Practice of Ethical Leadership, Markkula Center for Applied Ethics, 2017

7Skeet, "A Reflection from Indigenous People’s Day," Benison Blog, October, 2021

8Donaldson, T., & Walsh, J. P. (2015). Toward a Theory of Business. Research in Organizational Behavior, 35 181-207. http://dx.doi.org/10.1016/j.riob.2015.10.002

 

Feb 4, 2022