Tesla I explored some early stage limitations of ESG rating methodologies. In short, they focus largely on whether an organisation is managing ESG risk. They don’t discriminate too much on how they manage these risks and ratings may overlook innovation at the ESG edge. (I’ve since learnt from my friend Phil Barttram that many raters’ methodologies include way more data than are formally requested, scraped by AI from all over the place. But I think my earlier point still stands which is that these methodologies – and their disclosure expectations – are going to change.)
Anyway, as practitioners and activists, we want a more nuanced view of ESG action and performance – and one that doesn’t rely on AI and proprietary methodologies. Incite’s approach is informed by two factors: a company’s range of practice (what companies do) and their maturity (how well they do it) at the ESG edge.
For range of practice, we recognise that an organisation’s ESG effort may contribute to value delivery in broadly three ways:
A – protecting current value in relation to ESG risks;
B – creating new value in response to ESG opportunities; and
C – enabling value by collaborating on systemic challenges.
As companies become more familiar with their ESG edge, their capabilities and range of practice can broaden to encompass all three. (For more detail on expanding your organisation’s range of practice, see The Waves.)
For maturity, we look at how they are actually going about these things in the face of disturbance. Think of old-growth forest (or old-growth kelp closer to home, pictured above). Old-growth doesn’t simply mean the trees or kelp fronds are old. Rather it implies structural complexity, leading to microhabitats that increase diversity, abundance and potential resilience. Old-growth ecosystems are not impervious to disturbance – their mature characteristics evolve precisely because of low- and high-severity disturbances as they grow. Consider SAB’s local sourcing ability in relation to emerging black farmers and SMMEs. Whether AB InBev appreciated this or not – let’s assume they did – getting this together was not a breeze. According to scientists (and sustainability practitioners), it’s the journey that matters.
Depth of maturity emerges as ESG practices are coordinated and distributed. It’s like this in nature and, from what I have seen (and read), it’s like this in organisations.
- We start off by orienting our approach to strategy, metrics and disclosure to recognised good or best practice.
- We progress by coordinating these practices better, finding further opportunity as they become more integrated. Here, companies discover their purpose (e.g. Google’s purpose is to organise the world’s information and make it universally accessible and useful) and find other ways to enhance coordination at the centre. There’s due cynicism on the whole purpose fad, but I’ve seen accurate purpose statements play a useful role in expanding focus beyond current quarterly earnings.
- As ESG efforts mature, we reverse the flow of energy. From centralising coordination to distributing relevant ESG capabilities to those who access intelligence at the ESG edge. Our ability to respond effectively to complex challenges requires diverse views and novel insights – and we’re going to find these at the edge. Every employee counts, along with their networks. This is how resilience grows.
It may be possible to centralise ESG coordination and distribute ESG practices in one giant leap, but I haven’t seen it yet. Based on 30 years of learning with close to 100 companies and many more practitioners, our ESG Edge Performance Matrix positions companies in relation to their range of activity and maturity at the ESG edge:
All the companies plotted above are recognised global leaders in sustainability or directly related fields. But this recognition overlooks an important nuance: they are moving along different paths and encountering different barriers. We don’t need to expand our range of activity or maturity in linear stages. Consider your personal experience here.
- The Leading edge have been in the game intensely for a decade, and usually longer. They’ve worked something out. They expanded their range of activity early on and are now pushing ESG practices deep into their organisations. Their early limitation was finding partners that shared their perspective, but the present decade of disruption is fast closing the gap (see the 2021 GlobeScan / SustainAbility Leader Survey).
- The Slow ‘n steadies have been at it for less time but have the resources and motivation to try everything. Coordinators are spread thin. They are driving integration hard and dare not dilute this focus by distributing ESG practices. They are limited by complacency at the edge.
- The Leapfrogs may have a narrow range of ESG activity but they are doing things that others are only starting to think about. They’ve tied up the best partners and roadtested the tech. For the most part, they weren’t much concerned about sustainability or ESG risk – until their investors started rating them last year. They found an early wormhole into Shared Value innovation and leapfrogged the pressure to manage ESG risk. Their passion and hard work did the rest. They integrated ESG effort around purpose, using this focus to distribute the requisite practices across the organisation. Managing ESG risks requires less energy than bringing innovation to market, so they are positioned well. Their limitation is hubris at the centre.
- Most companies are still Warming up. Struggling to see the wood for the trees, they’re still engaged in what I call primary sense-making at the edge. They’ve not yet found their path and are vulnerable to a burgeoning sustainability services industry. “If you meet the Buddha on the road…” as the saying goes. There are a lot of Buddhas these days.
I’ve been intentionally light on detail so you can explore this approach for yourselves. Where do you see your organisation? What path might you take? If this looks interesting, watch out for a blog on our ESG Edge Maturity Framework, which is all about growing resilience at the ESG edge.
Banner photo, cropped from Kieran Wood at Unsplash, shows the kelp forest as habitat for sea otters amongst many other species.