Over half-a-century ago, economist Milton Friedman wrote a polarizing essay entitled “The Social Responsibility of Business is to Increase its Profits.” The essay is still being discussed and debated. In that essay, Friedman wrote, “When I hear businessmen speak eloquently about the ‘social responsibilities of business in a free-enterprise system,’ I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free enterprise when they declaim that business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends; that business has a ‘social conscience’ and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are — or would be if they or anyone else took them seriously — preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.”[1]

Friedman would feel right at home in today’s political environment where polemic reigns and social issues are divisive. Journalist Taylor Tepper (@TaylorTepper) writes, “The piece remains as polarizing today as it was five decades ago.”[2] He continues:

“For some, Friedman’s provocative theory augured a new phase in American economic life where ‘Greed is Good’ and profits are the only real goal of business. Yet many others saw in it a timely capitalist manifesto that clearly outlined the proper role that executives should play in our free market system. Commentators on Friedman are generally polarized between those who believe that businesses have a greater ‘social responsibility,’ and those who feel the social mission of business is making profits, period, with other social goals best left to politics. But both sides would probably agree that the world has become a more complex place over the last 50 years, and businesses have become ever more complicated enterprises that need to balance many different priorities. Moreover, the rise of socially responsible approaches to business and investing has refocused the priorities of both corporate leadership and many investors, whether they truly believe in broader social aims for business or not.”

Today, corporate social responsibility falls under a broader category called Environmental, Social, and Governance (ESG) practices. According to journalist David Coburn, the term ESG was coined in 2005.[3] He also notes, “Now solidly embedded in the global business lexicon, ESG has assumed a role unimaginable five years ago.” And, it seems, few reasonable businesspeople equate ESG with socialism or the undermining of a free society. Todd Wells (@1toddwells), a senior marketing and engineering leader, openly wonders what has changed over the past 50 years that makes ESG so important. He asks: “Why is this the case now? After years of talking about ESG, what’s changed now?”[4]

Why ESG is Important for Business

Coburn’s answer to Wells’ question is that the business environment has changed significantly. He observes, “The reality today is that there’s a compelling business case for pursuing an aggressive ESG agenda — even if it wasn’t necessary to comply with ever-increasing mandates tied to combating climate change.” He suggests business leaders consider the following facts:

• Consumers like sustainability. According to Coburn, “Consumers increasingly are willing to pay a premium to go green — upward of 70% would pay 5% more, all else being equal, McKinsey research shows.” Wells reports another “survey found that 88% of global consumers would choose to buy from companies with ethical sourcing structures in place over ones that did not.” On the other hand, studies have shown that if someone really likes a product, they are likely to find a rationale for buying it despite sustainability issues or other ethical problems faced by the product’s manufacturer. And, as inflation rages, product price is also beginning to trump other considerations.

• Government ESG Regulations are Increasing. Journalist Helen Atkinson reports, “New legislative moves, both in the U.S. and the U.K., … seek to compel corporations to proactively examine their supply chains, in order to establish that they’re actually doing the right thing. Or, realistically, not doing the wrong thing.”[5] As a result, Coburn notes, “Companies increasingly are requiring suppliers to show they are adhering to the same sustainability standards and other measures of ESG — or risk losing their business.”

• Employees like working for companies with a conscience. Coburn writes, “In a historically tight labor market, ESG is proving a key to hiring and retaining talent; 70% of employees say they are more likely to stay in a job with a sense of purpose.”

• Activist investors are on the rise. Atkinson reports, “Growing demands by shareholders and consumers for more responsible and sustainable business practices have already reshaped the corporate ESG landscape.” Coburn adds, “Investors now see climate risk as investment risk … and will invest in sustainability even if it means accepting returns 2-3% lower.” Wells indicates that investors generally don’t have to accept lower returns. He reports, “The World Economic Forum estimates that sustainable and ethical sourcing processes can reduce costs in the supply chain by up to 16%. Additionally, a recent McKinsey report found that top-performing ESG companies experienced faster growth and higher valuations than others in their sector by a margin of 10% to 20% in each case. The report also found that strong ESG credentials cut costs by 5% to 10% due to increased operational efficiency and waste reduction.”

Robert J. Bowman, Managing Editor of SupplyChainBrain, insists ESG activities have become an imperative for businesses. He writes, “Environmental, Social and Governance — each of those words evokes an extensive list of responsibilities, activities and business processes that reach deep into every conceivable part of the organization.”[6] Wells agrees that ESG has become a business imperative. He writes, “A rising priority for many companies is implementing environmental, social, and corporate governance practices into their business strategies. Adopting these practices can prominently influence your brand’s reputation, customer relationships, and your company’s overall success.”

Improving ESG Practices

Wells, like many other experts, believes that digital supply chains are the answer to many of today’s supply chain challenges — including ESG compliance. He explains, “A great place to begin mobilizing ESG initiatives is to see what processes can become more sustainable through digitization. While IT solutions can’t replace all material elements within a supply chain, digital tools can empower an organization to use resources and energy more efficiently.” Digitalization increases the generation of data. And, Wells insists, analysis of that data provides better decision-making. Bain analysts, Michael C. Mankins and Lori Sherer (@lorisherer), add, “We know from extensive research that decisions matter — a lot. Companies that make better decisions, make them faster and execute them more effectively than rivals nearly always turn in better financial performance. Not surprisingly, companies that employ advanced analytics to improve decision making and execution have the results to show for it.”[7]

Stephany Lapierre (@slapierreceo), chief executive officer of Tealbook, offers a few “do’s and don’ts” when it comes to implementing ESG practices.[8] They are:

• Don’t use ESG as a PR tactic. Getting accused of “greenwashing” can hurt a company’s reputation. Lapierre writes, “It’s not enough to simply say you’re going to focus on ESG. You have to onboard sustainable and socially conscious suppliers that can help you meet the goals you announced via social media and press releases.”

• Don’t focus the company’s rating. “While it may be a goal to increase your organization’s ESG rating,” Lapierre writes, “this can often lead to a ‘check the box’ mentality. By prioritizing individual tactics within your ESG strategy and holding the team accountable for organizational goals, you can focus on efforts to make impactful change. A better ESG rating will often be the outcome.”

• Don’t silo ESG implementation. Lapierre observes, “Often individual roles will be created to focus on ESG strategy. But if they don’t work with other departments, those strategies can be seen as separate from overall company goals. There needs to be total alignment between departments to ensure that those goals are met.”

• Do be consistent. According to Lapierre, “To truly execute ESG strategies, your entire organization has to be in line and adhering to tactics. If some departments are contributing to ESG goals and others are ignoring them, you create inconsistencies within the organization, which will appear uncommitted to sustainability and social initiatives.”

• Do use certified suppliers. According to Lapierre, “Not all suppliers who qualify as diverse or sustainable possess official certifications. By expanding your searches to include self-certified suppliers, you can broaden your scope of supplier discovery and gain a wider view of businesses that align with your ESG goals.”

• Do use machine learning and artificial intelligence. As Wells observed, advanced analytics can improve decision-making and improve ESG performance. Advanced analytics are often embedded in cognitive technologies. Lapierre insists, “Machine learning and AI allow you to consistently harvest, evaluate and analyze supplier data to quickly meet ESG goals.”

• Do remain flexible. In order to remain flexible, Lapierre asserts you have to “stay on top of change.” She adds, “In the tumultuous world of modern-day procurement, you can’t simply trust whom you know when it comes to meeting ESG goals. Business functions are constantly changing, and you need to be able to access up-to-date and accurate supplier data.”

• Do mind your ESG spend. Friedman was correct about one thing: A business must remain profitable to survive. Lapierre observes, “A vital part of a strong ESG strategy is monitoring spend to determine where there’s room for improvement. In some cases, you might find that you’re allocating large amounts of money to a handful of ‘popular’ categories, while shortchanging others that could help you to meet goals faster. By knowing exactly where your budget is going, you can identify additional categories that lead to better sustainability and social justice.”

Bowman concludes, “To date, progress by companies to embrace ESG-related practices hasn’t been especially encouraging. A report by the UN Intergovernmental Panel on Climate Change warns that, barring immediate action toward mitigating the impact of climate change, global warming will exceed more than twice the target of 1.5°C set by the 2015 Paris Agreement. Yet according to a recent study commissioned by the Harris Poll and released by Google Cloud, only about 10% of surveyed U.S. supply chain and logistics executives say they are successfully measuring their sustainability efforts through programs already in place (the global average is scarcely better, at 19%). And there’s plenty of work yet to be done on the social responsibility side as well, to eliminate forced and child labor, and ensure fair treatment of workers the world round.” In other words, it’s time that businesses pay attention to their ESG practices.

Footnotes
[1] Milton Friedman, “The Social Responsibility of Business is to Increase its Profits,” The New York Times Magazine, 13 September 1970.
[2] Taylor Tepper, “Milton Friedman On The Social Responsibility of Business, 50 Years Later,” Forbes, 16 September 2020.
[3] David Coburn, “Building Blocks of ESG,” MHI Solutions, January 2022.
[4] Todd Wells, “Why ESG, and why now? New data reveals how companies can meet ESG demands – and innovate supply chain management,” Diginomica, 27 April 2022.
[5] Helen Atkinson, “Get Ready for the Next Phase of ESG: Mandatory Corporate Due Diligence,” SupplyChainBrain, 17 May 2022.
[6] Robert J. Bowman, “Confronting the ESG Imperative in Supply Chains,” SupplyChainBrain, 17 May 2022.
[7] Michael C. Mankins and Lori Sherer, “Creating value through advanced analytics,” Bain Brief, 11 February 2015.
[8] Stephany Lapierre, “Five Signs Your ESG Strategy Is Flawed — and Five Ways to Fix It,” SupplyChainBrain, 17 March 2022.
[9] Sean Brown and Robin Nuttall, “The role of ESG and purpose,” McKinsey & Company, 4 January 2022.