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INTERNATIONAL CHAMBER OF SUSTAINABLE DEVELOPMENT
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A synonym to “granular” is “detailed”. A granular learning on E.S.G refers to its “scale” or “extent”. The term “granularity” in business refers to the layers of details taken into account during decision-making process (EcommerceMasterclass, 2022). In term of content-and-form architecture, in its straightforward explanation, content is what to be performed, about the substance and material, form is the way in which the content is arranged and performed, about the technique and method. In the context of business management, E.S.G should be depicted in a content-and-form architecture, where environment and society are acted as content and governance as form.
The Content: Environment and Society
The granularity of the environmental and social content is often opaque. Even though the EU trying to introduce the EU Taxonomy Regulation to “call for the creation of a common classification system for sustainable economic activities” (EuropeanCommission, 2020), in its efforts to create clarification for all stakeholders with appropriate definitions of “being green”, its robustness and feasibility remain controversial. Intense discussions are ongoing that the ultimate result of this legislation is still open.
Apart from the legislative level, more and more investors reply on E.S.G ratings to evaluate corporation information, a group of third parties providing E.S.G rating reports emerges. However, criteria, elements, metrics are disagreed substantially. Chatterji et al. provides two terms “theorization” and “commensurability” as the reasons for causing the divergence in E.S.G ratings (Chatterji et al., 2016). Research done by Berg et al., investigating the divergence of E.S.G ratings based on data from six selected E.S.G raters, discovered a “rater effect” that different views on categories are taken in E.S.G evaluation, which often happens that two different rating methods produce different assessment results on a same firm. (Berg et al., 2022) Raters have own preference, and the rater effect suggests that divergence follows rater-specific and firm-specific patterns. These patterns further suggest the structural reasons for the existence of divergence.
Although consensus is difficult to build, it is not mission impossible. Until the legislation can work out a more widely recognized taxonomy, there are existing standardizations working for environmental and social management system for organization internal performance. The International Organization for Standardization (ISO) released ISO 14000 family for the environmental management standards, and ISO 26000 providing guidance for companies to implement corporate social responsibility. ISO 14001 Environmental management systems (EMS) is a framework to help organizations to identify, manage, monitor and control the environmental issues. Such system can be tailored to the needs of the industry using it with quantified standards. However, ISO 26000 is a set of voluntary standards to help companies implement corporate social responsibility. As nature of social responsibility is difficult to be quantified, ISO 26000 provides guidance rather than requirements, standards can only be set for all types of organizations, regardless of their activity, size, or location (Fernando, 2023), confusion is occurred when organizations in different sizes, or different business models to share with the same group of standards. Key stakeholders from around the world should contribute to setting the ISO 26000 standards to achieve an international level of consensus.
The Form: Corporate Governance
Corporate governance is the system by which powers are exercised and controlled over the companies. Shareholders of the company appoint the directors to exercise such powers to satisfy their appropriate value. The appointed directors take responsibility for the governance of their companies in order to accomplish the interests of the shareholders. It encompasses a wide range of issues. In the content-and-form architecture of E.S.G, governance is about how to arrange and perform the environmental and social elements into the management strategy and practices. The C-suite, when designing the governance structure or setting rules and processes and practices, should blend in environment and society. The effectiveness of governance should be functioning by penetrating E and S in all levels in the organization
In this content-and-form architecture, although they are discussed as separate entities, the relationship is closely tight and related. The form, corporate governance, in which the content of being environment- and society- focused is presented, can shape and influence the impact and interpretation. It is like the orchestra performing symphony. Symphony is set (environment and society issues). The conductor (the board) should be able to lead the orchestra effectively, setting the tempo, shaping the sound, while each musician (employees, stakeholders) has the technical ability to play their instruments at a high level. Different orchestra might convey different emotion and meaning of the same symphony to the audience. Ultimately a successful performance is one in which the conductors and musicians are able to deliver the beauty and power of the symphony to the audience.
A Look into the Future
The growth of ESG in recent years has been exponential. The more granular look at E.S.G, the more apt to the idea that E.S.G is old wine in new bottles. The concept of CSR (Corporate Social Responsibility) has existed for many decades and have been largely neglected until the beginning of this century. Great wine is always a matter of perfect terroir, that blend of altitude, climate, and soil producing the essential fruit for excellent wine. E.S.G offers the world such an ideal mix of elements amid the best of 3 pillars: environment, society, governance, re-blend them all together to create a new taste to please the palate of any wine lover. A great wine is a very personal choice that comes down to the taste of the drinkers, so as E.S.G.. There is no universal one-size-fit-for-all rule or methodology for all companies to implement E.S.G. It is the confusion, but also the charm for organizations who can understand the essence. Looking into the future, it is likely that E.S.G will continue to thrive, but importantly, it is about the human survival that no one can stay out or left behind. Collaboration and cooperation should be built among individuals, organizations, nations, and the globe. The sooner, the better.
Reference
Berg, F., Kölbel, J. F., & Rigobon, R. (2022). Aggregate Confusion: The Divergence of ESG Ratings. Review of Finance, 26(6), 1315-1344. https://doi.org/10.1093/rof/rfac033
Câmara, P., & Morais, F. (2022). The Systemic Interaction Between Corporate Governance and ESG. In (pp. 3-40). Springer International Publishing AG. https://doi.org/10.1007/978-3-030-99468-6_1
Chatterji, A. K., Durand, R., Levine, D. I., & Touboul, S. (2016). Do ratings of firms converge? Implications for managers, investors and strategy researchers: Do Ratings of Firms Converge? Strategic management journal, 37(8), 1597-1614. https://doi.org/10.1002/smj.2407
EcommerceMasterclass. (2022). The Importance of Being Granular in your digital marketing. Retrieved 22/07/2023, from https://swifterm.com/the-importance-of-being-granular-in-your-digital-marketing/
Enriques, L. (2022). ESG and Shareholder Primacy: Why They Can Go Together. In (pp. 131-136). Springer International Publishing AG. https://doi.org/10.1007/978-3-030-99468-6_6
EuropeanCommission. (2020). The Taxonomy Regulation. Retrieved 22/07 from https://finance.ec.europa.eu/sustainable-finance/tools-and-standards/eu-taxonomy-sustainable-activities_en#what-the-eu-is-doing-and-why
EuropeanCommission. (2023). A European Green Deal. European Commission Retrieved from https://ec.europa.eu/commission/presscorner/api/files/attachment/859152/What_is_the_European_Green_Deal_en.pdf.pdf
Fernando, J. (2023). Corporate Social Responsibility (CSR) Explained With Examples. Investopedia. Retrieved 23/07/2023, from https://www.investopedia.com/terms/c/corp-social-responsibility.asp
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Jarvie, M. E. (2016). Brundtland Report. https://www.britannica.com/topic/Brundtland-Report.
Mischke, J., Woetzel, J., & Birshan, M. (2021). The necessity of doing well by doing good. Milken Institute Review (Apr). https://www. mckinsey. com/mgi/overview/in-the-news/the-necessity-of-doing-well-by-doing-good.
Sjåfjell, B. (2022). Reforming EU Company Law to Secure the Future of European Business. In (pp. 59-85). Springer International Publishing AG. https://doi.org/10.1007/978-3-030-99468-6_3
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Author: Ms. Huang Xumin, Certified ESG Planner, 國際可持續發展協進會
Introduction
In recent years, the manufacturing sector in Hong Kong has faced significant challenges, both locally and globally. Regulations regarding the environment and environmental sustainability are becoming crucial topics that companies need to address to remain competitive and ethical in today's world. The development of a circular economy (CE) has emerged as a crucial strategy for achieving social and corporate sustainability. This article examines the importance of implementing CE in the context of Environmental, Social, and Governance (ESG) development, drawing insights from a recent study of 189 manufacturing firms in Hong Kong. Additionally, the recently released ISO 59000 standard concerning CE emphasizes the need for companies to adopt sustainable practices.
The Role of Circular Economy in ESG
The circular economy is a transformative approach that not only focus in minimizing waste but emphasizes resources maximization. Unlike the traditional linear economy, which follows a 'take-make-dispose' model, CE emphasizes the continuous use of resources through recycling, reusing, and remanufacturing. This approach not only reduces environmental impact but also enhances resource efficiency and economic resilience.
In the context of ESG, CE plays a vital role in addressing environmental concerns. By adopting CE practices, companies can significantly reduce their carbon footprint, minimize waste, and conserve natural resources. This aligns with the environmental aspect of ESG, which focuses on sustainable resource management and reducing environmental impact. Moreover, CE contributes to social sustainability by creating new job opportunities and promoting sustainable consumption patterns. It also enhances governance by encouraging transparency and accountability in resource management.
Dynamic Capabilities and CE Implementation
Despite CE's benefits, many companies find its implementation challenging. However, studies found that the development of dynamic capabilities (DC) within firms can facilitate the transition to a circular economy. Dynamic capabilities refer to a firm's ability to integrate, build, and reconfigure internal and external resources to address rapidly changing environments.
A recent study of manufacturing firms in Hong Kong demonstrates that dynamic capabilities significantly facilitate the implementation of CE. Firms with strong DCs are better equipped to identify and pursue CE opportunities, adapt to new regulations, and innovate in their processes and products. By developing DCs, companies can enhance their overall performance and achieve long-term sustainability
Governmental Influence on CE Implementation
Governmental influence plays a crucial role in stimulating firms towards CE implementation. Policies, regulations, and incentive programs can create a favourable environment for companies to adopt CE practices. For instance, the introduction of the ISO 59000 standard related to CE provides a clear framework for companies to follow. This standard sets out guidelines for implementing CE principles, helping firms to align their practices with international best practices.
Moreover, government incentives, such as tax breaks, subsidies, and grants, can encourage companies to invest in CE initiatives. Regulatory measures, such as stricter waste management laws and extended producer responsibility, can also drive firms to adopt more sustainable practices. By providing support and creating a conducive regulatory environment, governments can stimulate the effect of dynamic capabilities and accelerate the transition to a circular economy.
Steps for Implementing CE in ESG Development
To successfully implement CE in the development of ESG, companies can follow these steps:
1. Assess Current Practices
Conduct a comprehensive assessment of current practices to identify areas where CE principles can be applied. This includes evaluating resource use, waste generation, and product life cycles.
2. Develop Dynamic Capabilities
Invest in building dynamic capabilities within the organization. This involves fostering a culture of innovation, enhancing skills and knowledge, and developing flexible processes that can adapt to changing conditions.
3. Engage Stakeholders
Collaborate with stakeholders, including suppliers, customers, and regulators, to create a shared vision for CE. Engaging stakeholders can help identify new opportunities, build partnerships, and gain support for CE initiatives.
4. Implement CE Strategies
Develop and implement CE strategies that align with the company's goals and ESG objectives. This may include redesigning products for durability and recyclability, implementing closed-loop supply chains, and adopting sustainable business models.
5. Monitor and Evaluate
Establish performance index and monitoring systems to evaluate the success of CE initiatives. Review and adjust strategies based on feedback and performance data.
6. Leverage Government Support
Take advantage of governmental support, such as incentives, and regulatory frameworks, as well as the collaboration between the government (or institution) and manufacturing sectors, to facilitate CE implementation. Stay informed about policy developments and actively participate in industry dialogues to influence future regulations.
Conclusion
The implementation of a circular economy is essential for the development of ESG in the manufacturing sector. By adopting CE practices, companies can address environmental challenges, enhance social sustainability, and improve governance. The development of dynamic capabilities within firms plays a crucial role in facilitating CE implementation, while governmental influence provides the necessary support and regulatory framework. As the ISO 59000 standard highlights, the transition to a circular economy is not only a prerequisite for sustainable development, but also a way of enhancing firm performance and adaptability. By adopting CE, companies can contribute to a more sustainable future and achieve their ESG goals.
Author: Dr. Jack. K. H. Hui, Certified ESG Planner, ICSD
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