What is the relationship between purpose, CSR, sustainability and ESG?
Purpose-led business creates value by serving society through its core business and a company’s purpose shapes all of its activities. The benefits to society then arise as a direct result of the core activities of the business through which it makes its profits, and not by separate corporate social responsibility (CSR) initiatives funded by profits from core activities which themselves may or may not benefit society.
A common temptation is to think of purpose as ‘social purpose’, or as being about being a ‘responsible’ business as distinct from being about the core business. For many companies, particularly those with a strong CSR or sustainability function, purpose can get siloed in those functions rather than being seen as informing the strategy of the core business. This can lead to supercharging a company’s CSR or sustainability initiatives, but a failure to realise the full potential value a truly purpose-led organisation can create for the business and for society e.g. the potential to explore new forms of innovation and revenue. In some companies, we have seen distinct CSR / responsible business, sustainability, and purpose strategies.
For purpose to be effective, it isn’t about simply rebadging existing initiatives, purpose must direct and shape the core business model and the strategy: e.g. what products and services are provided, to whom and how. The financial and non-financial outcomes and impacts from the strategy also need to tie back to the purpose. This could take time to put into place, but having a clear direction of travel from the outset should help the business think in an integrated way so that the work being carried out in sustainability and responsibility departments becomes part of a single core strategy, led by the purpose.
It can take some time for organisations to fully embrace the fact that purpose is not just CSR or sustainability and that it is about the core business – particularly if the heads of CSR or sustainability have been heavily involved in the work on purpose. We have seen situations where leaders have had a tendency to defer to heads of CSR or sustainability in meetings to lead on purpose – which can reinforce the tendency to associate purpose with CSR or sustainability. CSR and sustainability heads can play an important role in helping others in the organisation see purpose as being broader and as core to the business. We have also seen organisations where someone has been given the title ‘head of purpose’, leading to another silo for the purpose work. The head of purpose should be the CEO.
Another area of confusion that often comes up is the role of ESG and how it relates to purpose. The increased focus on ESG factors has helped more companies to look at the potential environmental and societal harms associated with their business and ESG ratings have led to some positive actions to address some of these harms. But ESG requirements are still emergent, disjointed and are still largely focused on compliance, risk mitigation and reputation management.
This article in Bloomberg, entitled The ESG Mirage offers an interesting critique of ESG and how the ratings are determined by ratings company MSCI (they estimate that 60% of all the money retail investors have put into sustainable or ESG funds globally has gone into ones built on MSCI’s ratings).
Beneath an opaque system that investors believe is built to make a better world is one that instead sanctifies and rewards the most rudimentary business practices…
Environmental factors are the most deceptive to the uninitiated because …[they rate the] potential impact of the world on the company, not the company’s impact on the world…the emphasis on ESG has delayed and displaced urgent action needed to tackle the climate crisis and other issues, including the widening chasm between the rich and poor.
We discuss this further in: The role of ESG in business and how it relates to purpose
Examples of how organisations have tried to manage this have included:
- Moving the CSR and/or sustainability teams into the strategy function in the organisation
- Giving different members of the leadership team responsibility to lead on discussions which would have previously been led by CSR or sustainability, so that the leadership all start to be more literate in speaking about these issues and start to see them as part of the core business, rather than something the CSR or sustainability teams alone are responsible for
- Facilitating a discussion to explore the relationship and difference between the various approaches (e.g. Purpose and ESG) and the desired outcomes
Example:
This article Achieve Audacious Sustainability Goals: Learn How From Eileen Fisher discusses how they went about integrating sustainability objectives into the core strategy of the business by fully engaging the CEO and leaders from all parts of the business and building a shared vision.
Moving from risk mitigation, minimising harm or doing good to being purpose led
Being a more responsible or more sustainable business or focusing on ESG factors tends to focus on meeting a set of duties imposed by external scrutiny from government, investors, NGOs, consumers, potential employees, etc. Of course, this does not mean that business leaders are not genuinely concerned with the non-financial impacts of their business: sustainable and responsible business practices can have a potentially massive positive impact on the world, especially in the case of very large businesses. The point here is that the mindset is typically concerned with minimising harm or doing good and the activities are often seen as a cost to the business or as a way to gain a social ‘licence to operate’ and are ancillary to the main business strategy.
Forum for the Future have developed a useful framing to help companies to assess their mindset across a spectrum of risk mitigation, seeking to minimise harm, seeking a positive impact, through to those who they describe as having a just and regenerative mindset (which broadly aligns with the mindset of a company seeking to be purpose-led as we define it). This image from their report A Compass for Just and Regenerative Business seeks to illustrate this:
The full report can be seen here. Pages 14-18 of the report can be used to help assess where a company is on this spectrum. Pages 21-27 seek to illustrate what a critical shift might look like when applied to a series of challenges and to some key business functions e.g. procurement, marketing and corporate affairs.