How ESG Misses the Mark ... and What You Can Do About It

What behavioral science is telling us about how people process information on ESG — and what this means for your business’ reputation

The relationship between environmental, social and governance (ESG) and business reputation is increasingly tightly intertwined. Yet new research from SEC Newgate,  Australia’s largest full-service strategic communications and social and market research firm, shows that many carefully designed ESG initiatives are falling well short of public expectations.

The community believes business has a major role to play in driving positive change in many areas and they also want to feel good about who they give their money to — so they actively want to support those companies doing the right thing. However, they are generally not aware of how seriously businesses are taking ESG and they don’t think there is much value being delivered. They struggle to recall examples of positive initiatives, despite the substantial investment of funds and resources in this space.

When they are aware of the ESG initiatives, they don’t know which information to trust. There is often a high underlying level of skepticism and distrust about motives, outcomes and effectiveness. Efforts are often viewed as superficial, more focused on style over substance and, as a result, some are actually eroding credibility.

The reputation risk arising from such a disconnect is clear — but why is it occurring?

Our research shows that people feel overwhelmed by the sheer volume of claims being made and the difficulty of comparison and verification. As a result, they are taking mental shortcuts to inform their views, including:

• Relying on mental availability and making judgements by using information that is readily available and easy to recall, such as from negative media coverage.
• Using representativeness — assessing a company based on its sector, category or past and applying a pre-existing judgement. For example, a mining company may be marked down due to its sector, not its actual performance.
• Succumbing to negativity bias — it is the bad ESG stories that grab attention and stay in people’s memories.

In addition, most people are anthropomorphising — that is, giving human qualities to businesses, talking about them being “good” or “bad” and using the same mental processes to judge an organization’s performance as they do people. Separate research suggests that close to 75% of our overall impression of a company comes down to our assessment of them on just two key dimensions: character and competence.

When it comes to character, we look for clues as to the company’s intent (do they really want to help, or is this window-dressing?); and integrity (are they trustworthy and will they do what they say?).

Under competence, we assess evidence of capability (do they have the knowledge, skills and abilities to deliver what they say?); and results (what proof or evidence of outcomes is there?)

What This Means for Your Business’ ESG Response

The tough news is, there is no single formula or blueprint that can be applied with uniform success. A business genuinely wanting to make a difference needs to develop its approach with careful and honest thought around who it is — its role, sector, history, existing reputation and the impacts it is having. Being crystal clear around these considerations will help ground your response in greater authenticity.

Once a clear-eyed and totally honest view around these elements is established, the most successful programs will also respond directly to the mental processes outlined above and therefore must:

1. Be entirely genuine. This requires you to be honest about what is really motivating you in pursuing the initiative, and to watch out for perceived benefits or conflicts of interest that may undermine your message.
2. Make a meaningful difference, not just be a grandiose statement, ambiguous or seen as greenwashing, “tick a box,” or virtue-signalling exercise.
3. Be demonstrated by persistent commitment over time. Quick-fixes or one-off initiatives are seen as tokenistic and insincere.
4. Be backed by clear evidence of benefit (and transparency when the benefits fall short, along with a willingness to course-correct).

Beyond these base elements, our research also suggests that the businesses that have really cut through have taken a stand on an issue that involves a cost to them (through an impact on profit or executive pay), or public perception of additional reputation risk, (for example that their position may isolate them from potential customers, interest groups or industry peers).

All the evidence shows that, in order to truly deliver value for the business and its stakeholders, boards and CEOs can no longer manage ESG as a knee-jerk response to an investor-imposed framework. It is critical that it is grounded in a strong understanding of reputation, how stakeholders interpret actions and build their opinions.

The exciting part is that this translates to a huge opportunity for strategic communicators. Real cut-through requires more than a cash splash into shiny new initiatives. It requires a deep understanding of your stakeholders and their views of your business, and the ability to advocate strongly within and outside your organization.

SEC Newgate’s global ESG Monitor 2022 will be released later this year. To discuss this research contact angus.trigg@secnewgate.com.au