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November 08, 2007

CEOs Add ESG Issues to Business Blueprints
    by Anne Moore Odell

A report from McKinsey & Company finds that more CEOs are including environmental, social, and governance issues in core strategies. -- Almost all CEOs think that society is asking businesses to step up to the plate and accept more public responsibilities for the environment, social issues and corporate governance, reports a study from McKinsey & Company, a leading management consulting firm. Yet, no matter driven business leaders are to act responsibly, there are still huge barriers to success.

"CEOs on Strategy and Social Issues," released in October 2007 The McKinsey Quarterly, ties globalization to the restructuring of the relationship between businesses and people such as shareholders, employees, consumers, and concerned citizens. Its authors, Debby Bielak, Sheila M. J. Bonini, and Jeremy M. Oppenheim, report on the increased demands CEOs face around environmental, social and governance (ESG) issues and how CEOs are responding to the demands.

The report is based on a McKinsey & Company survey, "Shaping the New Rules of Competition: UN Global Compact Participant Mirror." The survey was first released at the Global Compact Leaders Summit in July of this year, alongside studies from the UN Global Compact and Goldman Sachs.

"We believe there is a huge prize available to business and society if a tipping point can be reached -- one in which enlightened self-interest joins hands with increased trust in business to make way for greater mobilization of private resources against the biggest social challenges of our time," reads the UN Global Compact Participant Mirror. "Business leaders, especially of the world's largest corporations, have an unparalleled opportunity to lead."

More than 90% of CEOs surveyed said they are doing more to include ESG issues than they were five years ago. This addition of ESG issues serves two purposes, as CEOs both satisfy societal demands and create opportunities to gain market share.

CEOs of companies that participate in the UN Global Compact took part in the survey. The UN Global Compact is elective corporate initiative for businesses to align their businesses with human rights, the environment and anti-corruption.

Over the next five years, these CEOs project consumers to become the most influential group to influence businesses policies. According to the CEOs, consumers will overtake employees as the stakeholder group with the most influence. Governments and local communities also have a sizable impact on the way CEOs manage societal expectations. The media, non-governmental organizations, and regulators also wield the power to influence the direction of business.

The report cites environmental concern as the number one trend shaping society's expectations for businesses. Increasing environmental concerns were listed by 61% of CEOs, while 38% listed greater demand for and limited supply of natural resources as the top two trends driving societal expectations of businesses.

The rise of China and India as serious players in the global marketplace is another reason the contract between societies and businesses is being recast. The report's authors write: "Clearly, companies operating in these countries will be affected by local interpretations of environmental, social, and governance norms. They will have to find ways of demonstrating their local loyalties and, at the same time, build globally integrated systems of values."

Climate change, employee restrictions including educational systems, and weak public governance are the three most important ESG issues businesses must face to thrive in the coming years, according to the report. CEOs are well aware of the difficulties of implementing ESG policies. They must balance the short-term demands of shareholders concerning financial performance with the longer-term ESG investments.

In addition, industry and sector regulations vary from country to country, making it difficult for companies that apply stricter standards to compete against companies that don't share their standards. Forty-three percent of CEOs answered that competing strategic priorities were a barrier to CEO engagement on ESG issues. Complexity of implementing strategy across various business functions was listed by 39% of CEOs as another barrier to implementation of ESG issues in businesses' policies.

These and other difficulties in actually implementing ESG issues leads to what the authors of the report call a "performance gap." Although 72% of CEOs surveyed said that ESG issues should be incorporated into business policies, only 50% of CEOs responded that they actually have working policies regarding these issues.

ESG issues are dismissed even more in the management of supply chains, McKinsey's research found. Fifty-nine percent of CEOs answered that companies should include ESG issues as part of supply chain management, while a mere 27% answered that their companies include the policies into their supply chains.

The report concludes: "The barriers to implementing strategies that benefit companies as well as society often seem very hard to overcome. Yet during our research we found that many businesses are developing creative and commercially viable solutions for addressing issues such as water conservation, biodiversity management, finance for the poor, and treatment of HIV/AIDS."

The CEOs surveyed for the report seem to understand the global economy businesses operating in is reshaping the roles played by businesses. As members of the UN Global Compact, the CEOs surveyed are already well aware of ESG trends. Perhaps a survey of CEOs of companies that have not decided to sign onto the UN Compact would show different results.

As consumers, employees, shareholders, and other stakeholders push companies to act responsibly, CEOs have the role of speaking up on ESG issues for the good of their companies and the world. A tall order, perhaps, but most CEOs didn't become the heads of companies by stepping down.

© SRI World Group, Inc. All Rights Reserved.

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