Read: Let’s fix our ESG transparency problem by keeping things simple

Recent months have seen increasing scepticism about the validity and transparency of ESG ratings and how genuinely they represent an organisation’s environmental, social and governance credentials. Just this week, global giants Coca-Cola, Danone and Nestle have become embroiled in a less than transparent greenwashing row, accused of making misleading claims about whether their plastic water bottles are 100% recycled. It illustrates the challenges to businesses of wanting to do the right thing whilst remaining crystal clear about what they are actually doing.

The Government acknowledges that the sustainable ratings industry has a problem - in particular the lack of regulation on how organisations create ESG criteria and rate companies against them, despite the trillions of pounds of investment involved. So it is welcome news that it is intending to introduce a potential regulatory regime for ESG ratings providers and, following a consultation earlier this year, it is expected that new proposals may be unveiled as early as January. While ministers are still said to be considering the consultation responses, it is understood that the Treasury is looking at whether the measures could be implemented under existing laws or if new legislation will be needed. 

In the meantime, the UK’s markets regulator, the Financial Conduct Authority, has been encouraging the industry to adopt a voluntary code of conduct which is due to be published next month. In the spirit of transparency and clarity, it will ask providers to disclose the measures they take to avoid conflicts of interest and publish more information about their methodologies.

There are understandable concerns that any attempts to quantify the issue may just muddy the waters even further, obfuscating and confusing the very purpose-led companies who are trying their best to do the right thing. A stricter framework may deter some firms from making significant sustainability claims and many may find it difficult to source data or set sensible key performance indicators that will give any meaningful results against the suggested  metrics.

The work that our partner businesses in the Purpose Coalition are undertaking highlights the effectiveness of identifying issues that affect their staff, customers or communities and making those priorities their own, rather than seeking to place themselves in a league table that may be of questionable value and may, in any case, lead only to limited action rather than driving real change on the ground. A collaborative approach to tackling the fundamental problems that undermine social equality and access to opportunity for all will reap rewards, especially if it is supported by a shared framework. 

That approach includes socioeconomic measurement, with the Coalition working with its partners to introduce a system of reporting which can measure the socioeconomic background of the workforce and, crucially, track the progress purpose-led companies are making towards a more diverse and inclusive workforce. It also includes targeting those social mobility coldspots across the country which have traditionally been left behind, whether that is in the context of participation in higher education or attracting inward investment into the region. A laser-like focus on the problem, and regular monitoring and reporting of progress towards a solution, will make for much clearer evidence of a business’s social impact.

While we await a final decision from government on the nature of its intervention, and a definition of what good looks like, it is also clear that it must do much better in its own processes. Companies might queue up to label themselves as ESG champions but there is very little reference to their often massive supply chains which themselves have huge potential to make a significant impact on sustainability and a positive social impact. Reform of social value procurement – ensuring that what an organisation buys creates additional benefits for society – is long overdue. There can be a huge degree of scrutiny of the grand pledges on social impact that organisations make when they are bidding for contracts but little to no follow up to see if they actually fulfil their promises once those are awarded. That extends to public procurement too. The Procurement Act was finally passed in October and hopefully will provide greater flexibility for the UK in how it spends its money, moving procurement away from decisions solely based on price and towards ones that are of benefit to people and planet. But it is just the starting gun in an on-going process to transform current practice so that it is fit for purpose. 

There is a further element which highlights the need for ESG reform to be more transparent and more meaningful - its impact on defence companies. I have written before about how concerns about ethical investment standards have meant that they have regularly been denied the investment they need to support the UK and protect its values. The war in Ukraine merited a reassessment of ESG for the defence sector and against an increasingly volatile and dangerous global environment which shows no sign of diminishing, fresh thinking is more important than ever. It was particularly welcome that shortly after his appointment, the new Defence Secretary, Grant Shapps, joined our campaign by speaking out strongly against the exclusion of defence companies from access to debt and equity capital and by highlighting the importance of the sector to the economy through the creation of jobs and opportunities in local economies, especially in areas where there have traditionally been few opportunities.

Here at the Purpose Coalition, we encourage our members to follow their instincts and drill down on what programme of action will make a genuine difference on the ground - showing sustained commitment to generate sustained and meaningful change. The results are often inspiring for their customers, their workforce, and in the communities in which they are embedded.  Often that means keeping it simple rather than being drawn into judging themselves against evermore complex formulae.

Keeping things simple, sustained and authentic is an approach that can deliver inspiring results - both in terms of positive social impact and, crucially, long term commercial success. It’s an approach that the government would do well to keep in mind as it enacts its review of the ESG regulatory landscape.