The pandemic and its impact on work and the lives we used to lead have made us more conscious of developments in sustainability, climate change, environmental stewardship, and a range of other issues. Terms like "net-zero”, "carbon footprint", "green energy”, “global warming”, and so on, which would have been primarily in the vocabulary of scientists, policymakers, and socially engaged NGOs a few years ago, are now on the lips of school children. Countries and businesses, too, have not lagged. Many countries, including India, committed to setting targets for reducing carbon emissions at the recently concluded COP-26 (Conference of Parties) in a concerted effort to reduce the impact of global warming. Businesses have begun to make net-zero or carbon-neutral pledges, promising to reduce emissions from their operations to combat climate change. This has resulted in a convergence of thinking around specific measures that could be used as a standard metric. ESG (Environmental, Social, and Governance) has become a topic of debate, discussion, and action.

What exactly is ESG?

Environmental, Social, and Governance (ESG) are non-financial operational criteria used by socially responsible investors to evaluate potential investments. These investments could be in diverse areas such as mutual funds, businesses, projects, public-private partnerships (PPPs), and so on. The Environmental criteria look at a company's environmental stewardship, resource consumption, and carbon footprint. The social standards examine the company's interactions with its employees, suppliers, customers, and the communities in which it operates and its diversity and inclusion policies. Governance encompasses the leadership of a corporation, audits, internal controls, and shareholder rights.

As disparate as the terms may appear, ESG has become a call to action, particularly for large corporations and international bodies, as they respond to stakeholder concerns beyond bottom-line performance.

The significance of "Governance" in ESG

When assessing ESG concerns, the emphasis on "E" and "S" tends to relegate the "G" aspect to the margins. Governance is a critical factor in determining a company's approach to ESG because leadership drives a company's vision and focus. As a result, while financial performance is undoubtedly essential for a company's survival and growth, it is no longer the only metric used to assess it. There is sufficient empirical evidence to show that a lack of robust governance norms is more likely to lead to underperformance, business failure, and unethical behaviour.

Governance and Ethical Leadership

Large corporations are no longer solely accountable to their shareholders. Developing a social consciousness is becoming an expectation consumers have with the brands they engage. Social media is quick to acknowledge the positive aspects of a company's ESG outlook and equally quick to criticise if these are ignored. Well-known brands have realised the importance of ESG performance as part of their ongoing business performance metric. Acknowledging these global trends, SEBI in May 2021 introduced sustainability-related reporting requirements for listed Indian companies.

Ethical leadership is at the heart of governance. Western Governor's University, a non-profit private online university based in Millcreek, Utah, defines ethical leadership as "leadership that demonstrates and promotes normatively appropriate behaviour through personal actions and interpersonal relationships"(https://www.wgu.edu/blog/what-is-ethical-leadership2001.html). Simply put, ethical leadership is top management behaviour that demonstrates honesty, integrity, trust, fairness, and community welfare (CSR).

Leaders are an organisation’s brand ambassadors. They are the public face of its value system and act as influencers and message drivers. The oft-quoted adage "practise what you preach" is never truer than when it comes to leadership. Ethical work culture is rule-based, value-based, and ingrained in the DNA of a company. As a result, the values instilled by a leader drive cultural transformation, encouraging employees and other stakeholders to adopt the same values, thereby bolstering a linear progression toward achieving the "G" goals.

Ethical leadership is necessary

With widespread internet access, customers have the information they need to make better choices. This is especially true for the millennials, the more environmentally conscious generation of consumers. Since they take leadership at face value, the leader’s message must be consistent and constant. Jim Kouzes and Barry Posner highlight this in their book, The Leadership Challenge, with the quote, "if you don't believe the messenger, you won't believe the message."

Ethical leadership has a knock-on effect. It fosters and maintains employee trust in management actions—the "walking the walk and talking the talk". It also gives customers confidence in doing business with and engaging with the company.

While most large businesses have ESG policies in place, ethical leadership will drive its implementation. A well-designed ethics programme supported by ongoing training is vital for good governance. It fosters a feedback culture through an open-door policy. Even if an organisation claims to value whistleblowing, employees and other stakeholders must have trust in the process; red flags must be raised, and appropriate action must be taken, including the prompt resolution of complaints at any level of the organisation. Employees then develop a sense of belonging and motivation with faith in the management doing the right thing.

To summarise, ethical leadership is the X factor in governance, transparency, trust, and fairness.

Disclaimer: Views, thoughts, and opinions expressed in the blog are solely that of the author, and not necessarily of Sony Pictures Networks India and/or its subsidiaries and affiliates.