In this age of interconnected global commerce, a company’s legacy and attractiveness to stakeholders and investors is no longer marked only by its profitability but also by its principles. With a growing consciousness around the environmental (E), social (S), and economic repercussions of corporate governance (G)—combined as ESG—stakeholders and investors look at criteria for responsible business.
Rooted in the ideals of business ethics, which grew to prominence in the 1970s and 1980s, ESG represents a renewed and holistic commitment to ethical corporate behavior. The UN has recommended investment considering ESG issues since 2004. Still, like any evolving paradigm, it has its complexities and challenges. (Risks and Benefits of ESG Investing February 2022 | theearthandi.org)
ESG Proponents and Critics
Proponents say that by adhering to ESG principles, companies send a clear message to stakeholders and investors about their commitment to doing business ethically.
When businesses follow ESG standards, they can anticipate and avoid potential socioenvironmental pitfalls. This fosters trust and ensures a more stable long-term operational landscape.
Also, companies that are socially and environmentally responsible have more sustainable business models, are more appealing to consumers and investors, and attract top talent. (ESG isn't just about doing good. More often, it's good investing | Bloomberg Professional Services)
Companies that are socially and environmentally responsible have more sustainable business models, are more appealing to consumers and investors, and attract top talent.
Conversely, critics say that it is tricky to accurately gauge performance on ESG criteria. For instance, the reliability of ESG scores was questioned when the S&P 500 ESG index in 2022 included oil-and-gas company Exxon Mobil on the list, but not Tesla, which exclusively manufactures electric vehicles. (How a Sustainability Index Can Keep Exxon but Drop Tesla – And 3 Ways to Fix ESG Ratings to Meet Investors’ Expectations | Michigan Ross/University of Michigan).
Critics also say companies can tout ESG compliance to improve their public image without genuine commitment. This superficial portrayal is known as greenwashing.
Moreover, universally imposing one set of values can lead to oversimplifications and misunderstandings; for example, what works in the developed world may not work in the developing world.
Finally, implementing ESG standards can be costly, and small businesses with limited resources say that ESG could inadvertently marginalize them. (Let’s not kill small business in the name of ESG | IEDM/MEI)
More than 140 entities in the US alone, ranging from non-profits to private firms, are at the forefront of determining ESG scores. (ESG Scores: The good, the bad, & why they matter | esg.conservice.com) They assess a multitude of parameters, from a company’s carbon footprint to supplier networks to governance structure.
For instance, associating with businesses known for child or slave labor, or those with high environmental liabilities are likely to weigh down a firm's ESG rating—although this is a task that, unfortunately, is not always performed adequately by scorers (ESG’s Biggest Miss: Supply Chain Visibility | CFO.com).
Despite these challenges and obstacles, some companies rise to the occasion and receive well-deserved high ESG rankings. The American Water Works Company (American Waters), a publicly traded US-based water and wastewater service utility company, and Dassault Systèmes, a French multinational software corporation developing 3D design, simulation, and manufacturing software, exemplify robust ESG practices.
American Water Works Company
A stalwart of the industry since 1886, American Water's emphasis on sustainability, leadership, and transparency has garnered significant accolades and cemented its reputation as a leader in ESG integration. (ESG Evaluation: American Water Works Co. Inc. | S&P Global Ratings)
American Water’s impressive score of 87 (out of 100) on its S&P Global ESG Evaluation reflects its dedication to safety, environmental stewardship, and public health, and the integration of these values into its strategy. This commitment's hallmarks include providing safe drinking water and fostering a diverse and inclusive workforce.
Under the leadership of Walter Lynch, CEO and president, the company understands that delivering safe and affordable water is just the tip of the iceberg. Numerous initiatives highlight the company’s push towards a sustainable and socially impactful business model, earning them the #1 spot on Sigma Earth’s Top 10 ESG Companies of 2023. (Top 10 ESG Companies Of 2023 - Sigma Earth)
To determine its ESG criteria, American Water looks at various facets of its operations. Environmentally, the company recognizes risks like water-borne illnesses, inefficient water use, and other environmental hazards. Its focus on leak detection and water use reduction is commendable, setting it apart from its peers. Moreover, its proactive approach to tracking and avoiding water sources from stressed regions and its forward-looking approach to exploring other water sources to increase water system resiliency speak for its commitment to the environment.
Socially, the company recognizes its pivotal role in the communities it serves by maintaining high safety standards and ensuring a diverse workforce. Its strategy to acquire and improve failing water systems is commendable, proving its commitment to these communities.
Environmentally, the company has achieved a 4% reduction in water delivered per customer since 2015 and aims to achieve a 15% reduction by 2035. It is also on track to meet its ambitious target to reduce greenhouse gas emissions by 40% by 2025. The company's focus on infrastructure investment, particularly pipe replacement, is another significant step in its ESG preparedness.
Socially, American Water has showcased its commitment by maintaining impeccable safety standards. With a diverse workforce, the company also has partnered with educational institutions, encouraging skill development and building a quality future workforce.
The company’s governance structure and oversight mechanisms are superlative. With ten out of eleven board members being independent directors, the board emphasizes objectivity and adherence to the company's core values. Their transparent reporting and disclosure practices are part of strong governance values.
The risk of water scarcity is a looming concern in Western states and especially in California.
Despite its admirable efforts, American Water is not without its challenges. The risk of water scarcity is a looming concern in Western states and especially in California. The company's focus on water efficiency and recycling is paramount in this scenario. Another challenge is community opposition, particularly when the company takes over failing systems. Privatization is often met with skepticism, and managing community relations in this regard is crucial.
However, American Water’s clear strategic direction and strong alignment with ESG values make it well-equipped to navigate these challenges. The company's forward-thinking approach and commitment to ESG values stand out in the industry. (Our Sustainability Story | American Water)
Dassault Systèmes (3DS), a leading French software conglomerate, is committed to ESG values as companies globally grapple with environmental crises and societal upheavals. Its proactive approach offers lessons in resilience and adaptability, and its ESG evaluation score is an admirable 84 (out of 100). (ESG Evaluation: Dassault Systèmes SE | S&P Global Ratings)
Operating predominantly in the technology sphere, 3DS reaps 90% of its revenue from software, with the remaining coming from consultative services. While its direct environmental imprint might appear minimal, the widespread use of its groundbreaking 3D imaging software by aeronautics and auto manufacturers significantly reduces their need for building wasteful physical prototypes.
While 3DS’s direct environmental imprint might appear minimal, the wide use of its groundbreaking 3D imaging software by aeronautics and auto manufacturers reduces the need for building wasteful physical prototypes.
Over a short span from 2018 to 2021, 3DS increased its renewable electricity use from zero to 75%, setting the ambitious goal of 90% by 2025. The company's staunch commitment to the Science-Based Targets initiative (SBTi—Science Based Targets initiative) and emphasis on reducing consumer-use emissions further underscores its determination to curb its carbon footprint.
3DS's drive for circularity is equally noteworthy—recycling nearly 98.4% of waste from electrical and electronic equipment. The company is steadily steering its clientele toward sustainable practices by expanding its lifecycle analysis module to various sectors. However, 3DS lags in monitoring office waste and tracking its water footprint.
Its governance structure is finely calibrated with transparent oversight layers, including a dedicated committee for R&D. A particularly commendable feature is its board composition—all board committees include independent directors, ensuring a balanced decision-making process.
Championing Social Values
Despite the sectoral upheavals in 2021, the company has upheld high talent retention rates and offered training well above the sector median.
3DS’s Human Resources (HR) leaders took a life-changing online class in Business Sustainability Management at Cambridge Institute for Sustainability Leadership (CISL). They learned that employee engagement initiatives translate into better inner-company communication, cooperation, and morale. As a result, the HR department promotes a sustainable company culture and organizes fun and creative activities for its employees relating to environmental ethics.
Special mention is due to its gender diversity goals, aiming for a managerial workforce with 30% women by 2025.
A potential area of contention is 3DS’s CEO's (Bernard Charlès) remuneration, which in 2021 was 552 times the median salary of 3DS employees. While this can be attributed to his long-standing association and contribution to the company, it does pose questions about pay equity.
Navigating ESG Challenges
3DS's primary challenges lie in optimizing resource management, enhancing data center efficiency, and refining waste monitoring. Tackling these issues requires a nuanced approach, balancing immediate business needs with long-term ESG goals.
Given the diverse local regulatory environments, another challenge is ensuring consistent ESG practices across global operations. Maintaining an exemplary cybersecurity record, especially in today's volatile digital realm, demands constant vigilance.
Maintaining an exemplary cybersecurity record, especially in today's volatile digital realm, demands constant vigilance.
Dassault Systèmes stands out as an ESG trailblazer, embodying how companies can intertwine profitability with responsibility. While the road ahead is fraught with challenges, 3DS's commitment and innovation-driven approach promises a sustainable future for itself and its clients. (ESG Management | Sustainability Commitment - Dassault Systèmes)
Refining ESG for the Future
For ESG to fully realize its potential, proactive engagement, and employee buy-in are essential. Companies ahead of the curve, cognizant of evolving norms and global standards, are better poised to adapt to current and future regulations, especially as regions like Europe have already begun enforcing ESG standards (Environmental, Social, & Governance Laws and Regulations Report 2023 Germany).
But beyond mere compliance, the onus is on firms to be authentic. A major greenwashing scandal was revealed earlier this year when a high-profile investigation learned that “over 90 percent of rainforest carbon credits issued by Verra, the world’s leading carbon credit certifier, claimed reductions in deforestation that didn’t exist,” thus making the offsets worthless (What are carbon offsets, and are they scammy? | Vox) (Bogus Carbon Credits a 'Pervasive' Problem, Scientists Warn | Time).
As empty boasts of future ESG compliance and other greenwashing controversies surface, businesses need to ensure their ESG commitments are realistic and translate into tangible, positive outcomes.
Fortunately, some companies, such as American Water and Dassault Systèmes, have shown that doing just this is possible.
Navigating the intricacies of ESG principles, American Water Works Company, and Dassault Systèmes showcase the importance of setting tangible and measurable goals. Their commitment to transparency and independent governance is evident in their boards predominantly comprised of independent directors, ensuring balanced and unbiased decision-making. By integrating ESG values into their core operations and company culture, these two companies show other companies a viable way forward, proving that authentic commitment to ESG is achievable and beneficial to the bottom line.
*Marion W. Miller is a French bilingual researcher, writer, and editor now residing in Northern Virginia. She has master’s degrees in Business and Economics and International Economics and Economic Development. She has also ministered for community development and world peace. As a grandmother of eight, she cares deeply about environmental stewardship and preserving natural wonders for future generations. She has traveled to many natural sites in countries around the world and now escapes to the gorgeous Shenandoah Valley National Park whenever time allows.