Episode #5: ESG vs Sustainability

Our guest on this episode is a veteran of the sustainability industry with a breadth of experience from retail to mining, Jack Cunningham. Together we’ll be exploring something that is both surprisingly and yet not that surprisingly misunderstood - ESG versus Sustainability. Join us as we discuss the difference and why the distinction matters.

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Audio Transcription

[00:00:00] Sean:  Hi there. My guest today is Jack Cunningham veteran of the sustainability industry with a breadth of experience from retail to mining. We'll be talking about something that is both surprisingly and yet not that surprisingly misunderstood. It's very discussion in public places has led to at least one person that we know of losing their job.

Great to be talking to you, Jack, please tell me what's the difference between ESG and sustainability?

[00:00:40] Jack: Yeah, it's a very topical question, Sean. which is I'm sure partly why you've posed it. and it's also, I think, somewhat controversial at the moment and it's causing a sort of ripple effect in the sustainability world broadly, but also then out into industry sectors. and there's, there's something of a sort of civil war happening at the moment between sustainability folk or people who operate in this space and the terminology. It's a lot of this is to do with terminology, but actually how companies address social, environmental, governance issues. It does talk to this kind of slight discrepancy between ESG and sustainability. And I come from quite an old school view of sustainability and I'm schooled in the classic interpretation which originally was sort of coined by John Elkington, 'the triple bottom line', which essentially is that companies are seeking to maximize their economic benefits, their profit, their growth, shareholder dividends, whatever it may be, but they shouldn't do that without being considerate of social and environmental factors and trying to mitigate their externalities. And externalities for listeners who may not be familiar are those impacts that are typically not valued or costed into our economic system. And so that then led companies and leads companies to think much more in inwardly, with the help of stakeholders, what their impacts on the world are, right? So, the pollution you're creating, the social upheaval you may be causing, the jobs you may be creating, you know, whatever it may be that you are bringing to the world or you are impacting on the world are the externalities that companies should be focusing on minimizing in the pursuit of growth and profit. And what we have now with ESG is an inverse of that. ESG is and the frameworks that are supporting the kind of ESG methodology are much more focused on the risks caused by those factors on the company and the company's profitability, which is of course the opposite way of looking at this. So, if we take something like TCFD, the Task Force for Climate-Related Disclosures, the whole framework for TCFD, which requires companies to think about climate risk is positioned in such a way that allows investors in that company to attribute, and understand the risks posed by climate change on the company, not what the company is doing to contribute to climate change. Which is the sustainability, lens. So, we're at this point in the debate and the discussion and point in history where these two are being conflated, they're being drawn together and talked about in the same way.

[00:03:40] Sean: Absolutely. I was just, I was going to say from a kind of outside in perspective, it's a hundred percent conflated because I mean a lot of people listening would be thinking, well, hang on, I thought ESG really was about lowering impact. You know, why are we giving ESG scores and investing in, in companies with good ESG ratings, if they're not trying to lower their impact? And what we now understand is that's sustainability. ESG is not necessarily about lowering your, your impact. Is that correct?

[00:04:09] Jack: Yeah, absolutely. And I think it's important to note that the two are linked and where we are now came from a place or came from places of good intent, right? So, whether it's reporting frameworks, let's take the global reporting initiative, whether it's principles around response and investment, let's take the principles for a responsible investment, PRI. These are all frameworks and systems which were originally designed to give companies guidance on how to do better business and how to be better corporate citizens, including disclosures and reporting, and demonstration to their stakeholders about what actions they were taking to mitigate social and environmental impacts. But those frameworks and those systems are now being reframed. And something of a Trojan horse kind of effect has occurred here whereby that reporting, the systems that surround and rate companies that help investors or stakeholders understand which companies are good, which companies are bad, which companies are doing stuff, which companies are doing nothing. None of that actually addresses the underlying social, environmental impact or the social environmental risk at hand. So, you know, we're in a situation where, two sides of the coin are linked, but are diverging, but are also being connected in the minds of business leaders, of professionals who are entering this space for the first time. And it's, it's deeply worrying to me that, as somebody who got into this space in order to help companies make change and, and be better, that we are essentially thinking about this through the lens of valued erosion to the company, rather than environmental and social impact reduction by the company. And this is playing out in multiple sectors, you know, of course this obviously comes to bring, to bear on the extractor sector as well.

[00:06:12] Sean: Can you kind of paint a picture about that? Because that's, that's quite a nuance about value preservation, as opposed to minimizing impact. Can we flesh that out a bit? What does that look like on the ground for either a mine or maybe a retail company, or is there an example that we can talk through?

[00:06:29] Jack: Yes. I suppose, my most recent experience in the extractives industry would, would be the best place, most relevant place to sort of bring that to light. I think every extractive company has a vast amount of compliance related, license related, legal requirements on them before they even set foot in a country, let alone start extracting minerals or any other resource. Around that, of course, there are obligations. Some of which are placed on them by investors, some of which are expected of them by country governments or local communities to undertake social impact work and, and benefit the local community, either through local content, investment in infrastructure, provision of training, whatever it may be. and around that, of course there are systems that the company implements in order to bring those additional benefits to life. Due diligence systems, frameworks, policies and procedures, and the company will look to existing systems and management systems in particular as guidance as to how to do that. Now you can invest in a huge amount of time and effort in doing that, and you can still come unstuck. In my experience, you, you spend an awful lot of time trying to get things right on the ground, which is absolutely necessary for social license to operate and kind of insulates you from real life risks. Communities burning your plant down because they're unhappy or, workers going on strike or food security issues around the mining operation. That has no real bearing in relation to what a company says in its ESG report, because the two aren't inexplicably linked. It's very difficult to paint picture and provide data which reassures investors about the security of their investment through the ESG report. You can only really do that if you get under the skin and show the investors how all of this stuff is protecting their capital or their investment. and I think the problem is that we are now so focused on the latter, i.e. the ESG reporting piece, the data, the frameworks, you know, have we set a 2050s net zero target? Have we met this particular performance standard? Rather than thinking about the actual granular level issues at hand that I think, actually protect the value of the company. Certainly, in the extractive sector, you know, we have a couple of experiences there and I dare say there are other similar ones related to the environment where just focusing on carbon reduction emissions and in your 2050 plan that has no bearing on whether or not you are meeting your license conditions or you are polluting a water course and affecting people's drinking water at a mining operation. And whether that becomes a legal obligation on you. I think it's very clear that in order to ensure value or protect value, you've got to make sure that you are implementing those programs, as best you can, without entailing excessive costs, of course, as best you can, you know, at the operation.

[00:09:55] Sean:  Those points that you raise are actually, I find really, really on point. So, there may be a mining CEO listening. Thinks, hang on, I'm employing this top rate, sustainability director who's working his or her butt off and we are producing some great reports and some great metrics. By all accounts we're doing things right in the ESG space. But from what I hear now, we are not doing it right. And my answer to that would be, you know, I've walked onto to a number of sites over the years where you've, and actually quite recently in the, in the last year where the online ESG presence and reporting is actually really impressive and they are ticking all of the boxes but when you walk onto the mine site or the exploration site, they are one or two incidents away from it being burnt down as you say. So, what I'm kind of reaffirming is that for that value preservation it really is about what effects are happening outside the fence line and not necessarily about the reporting aspect, which I think ESG, from what I see it's because it's easier. It's so heavily slanted on carbon and carbon reduction, as opposed to the difficult aspects of, are you making life in your neighbourhood better or worse? And is that impacting your business and the people around you?

[00:11:24] Jack: Yeah, absolutely. And I think if you try to draw a simple analogy, you might take something like, human resource metrics, right. It would be like saying that the health of the company is measured best by whether or not the workers got paid on time, okay. Not what the culture of the company is and how people feel about working there, how they feel about their management team, the strategy, the working conditions.

I think the issue is that sustainability is, is even broad, you know, obviously incorporates human resource issues within it, but sustainability is such a vast topic. Any one of those bits of it can undermine the overall reporting piece and I think reporting in itself is important. Transparency is important, but we have to remember that reporting is a discipline. It requires skilled people. Typically, it requires people who are not employed by the company. You know, most companies employ external agencies to produce the report and of course the people who are producing the report are typically based at head office far away from the mining operation or extractives operation. They themselves are being fed information and data. They have necessarily no knowledge of what the data actually is. They may not be data experts. They may not understand the subject matter. I certainly know of a number of people in the industry whose roles were solely to provide the ESG report. They'd never even been to the mining operation before. They didn't know what the mining operation entailed or looked like. So, they were very blind as to what the data was saying. They were just being fed this information to then feed it onwards to the stakeholders. And I think, that's an issue. It's an issue, regardless of industry, it's an issue in every company, it's a function of communication.

[00:13:23] Sean: Maybe to continue the analogy slightly. If ESG reporting is a discipline, I would maybe say that sustainability and impact is a culture and it's a corporate culture of how you operate on the ground and you can see it quite often within the first 24 hours of arriving on site, by talking to some of the leadership whether there is actually the culture of sustainability value creation and value preservation. Which is maybe something we can kind of chat about as well, how we use sustainability and going beyond ESG reporting and where sustainability allows you to create value within your operation and not only preserve value as well.

[00:14:06] Jack: Yeah, I think there's also a challenge with how people understand the issue. You know, there are cultural interpretations of sustainability or CSR or whatever the language is. There are different worldviews, you know, you can speak to certain managers from different countries they'll each have a different view about the priorities at hand in relation to environmental, social, governance matters. Some people I've worked with fundamentally don't view human rights as an issue. Their worldview does not enable them to understand human rights as we do within the context of the northern hemisphere and the systems that have been created around human rights to protect human rights. And so, once you get down to that level, the kind of value creation bit, it's another level of conversation, you need to try to tease out with folks on the ground, particularly in the mining industry where, let's be honest, their main purpose for being in a remote part of the world is to get the stuff out the ground as quickly as possible process it, export it, sell it, get the revenue to reinvest in capital, to keep doing the same thing. That's their primary purpose, but the value creation piece is going to be much more around well where does our reputational gain come from doing this stuff? How do we then describe what we're doing in such a way that is more attractive to inward investment into the company beyond just the basic metrics? As we are probably expecting, investors who are doing proper research, carrying out proper engagement and due diligence on the companies they invest in should have the knowledge to ask much more accurate and niche questions of a company they're looking to invest in.

[00:15:52] Sean: So, let's not throw the baby out of the bath water here. Everything has a use. How should we be using ESG? What's the best use for it and what's the best use conversely for sustainability? And how do we marry the two? How do we get the best out of both paradigms?

[00:16:10] Jack: I mean, I, I suppose I consider sustainability as a function or a subject of the change process, a change process, a transformation activity. It's so broad. It's so complicated. It's not necessarily changing the entire business model, but it's not far off. It's changing culture, it's changing systems, it's embedding practices that are new and it's requiring of its people to do things differently. ESG for me is the kind of icing on the cake. It's once you've got the foundational layers of the cake, then you put the icing on top and, and the cherry and you present to the outside world the genuine formed entity and the formed version of the cake. I think one does have to come before the other. We're into talking about greenwash territory here, right. There are lots of companies who can report very nicely, get a good rating, in track with investment because of that rating. But equally are not clearly doing what they're supposed to be doing. If you look at the ESG metrics. And so, you have to have one first and then the communication I think, and the reporting comes second. Now that's in a perfect world, but there are obviously examples at the moment where this is happening, particularly in the oil and gas sector. There are a number of the super majors who are being sued for their net zero targets. Which seem to be completely out of whack with what they're doing and what they're investing. They're spending more money on making their green credentials clear then they are in actual capital projects to do the very thing they're meant to be doing to get to net zero. But yet they're receiving good ratings in the ratings systems. So, I think of course they can coexist, but the danger of this conflation is serious because it will focus people on the path of least resistance. Which is do the frameworks, get the rating, look good on paper, job done without actually doing anything.

[00:18:17] Sean: So where's the starting point for this transformation? Does this start with the board? Does it start with the executive, the CEO, is it all of the above? Who drives this and who needs to really understand what it is they're signing up to?

[00:18:33] Jack: Well, I mean, obviously the fence sitting answer is everybody. It's everybody's responsibility. It's the board, it's the exec team, it's investors, it's willing middle management. The companies I've worked for the greatest energy has come from the top team. So, my time at the UK supermarket Sainsbury's, there was a very strong CEO, Justin King. He was extremely knowledgeable about the retail environment, firstly, but also he was extremely knowledgeable on matters relating to supply chain sustainability. He was the first person in the UK to introduce fair trade bananas on mass, across the whole business, without even offering customers a choice. He just said, it's the right thing to do. We'll take the margin hit. We're just going to invest in fair trade bananas and that totally shifted the needle on fair trade bananas. He was a visionary. He understood the need for it from marketing point of view, from a sales point of view, from competitive. Absolutely. He was as commercially hard-nosed as they come, but he understood something moral about what needed to be done. And so, I think that kind of level of leadership is very, very important backed by a very supportive board. A board that is willing to sign off on big numbers, is willing to take risk, but also understands the size of the challenge and the role that the company can play. And of course, then that all cascades down and it's like any transformation if it's well thought through and the culture of the company is considered and there are systems and programs to make that happen, then it's a lot easier. But that, isn't always the case, it's often driven by the sustainability team or the marketing team or a particular silo that is really keen on this. But is basically trying to push everybody along. So, it does require everybody's input.

[00:20:32] Sean: There's so much you can explore in this, but as we round the conversation off, if this really needs to be driven by leadership in the board what is the key bit of advice you would give board members, or aspiring board members either to drive this change or also to keep themselves safe? What advice would you give them?

[00:20:52] Jack: I think it's ensure that the sustainability program is not an afterthought. That it is there, particularly for extractive companies that are at, exploration stage. There's a tendency to just, of course, kick the can down the road because you have no idea if the project's even going to get to full scale operation. So of course, you'd be front loading all the cost with no guarantee of any kind of commercial return from the project. But I think it's an important investment into the future of a project. It's like a building, right? If you start building a building with bricks that are half baked, you're going to end up with a building that's unstable in the future. So, I think it's important not to cut costs at exploration stage, and also as execs, you know, you obviously have to deal with huge amounts of information and data and, and decision making all the time, but you need to ensure that you have a level of understanding and granularity about the development of the project at very detailed level, very, very detailed level. You need to have the intel, particularly from the social side. What's the sentiment? What are the key issues? As we know Sean, do we need a road here for the people to get their stuff to market? Where's the nearest access to drinking water? What kinds of opportunities can we provide local people from day one without making too many promises? You have to really be cute to the acute details of a project and constantly check in on that, because that's the canary in the coal mine. And I'm sure I got reminded of that phrase from you. That kind of intel is absolutely critical because if you don't listen to that data or that intel potentially just storing up problems for the future, and that's clearly a risk and you can forget about everything at, at the ESG end of the scale, but you can talk about how great the exploration is, the value of the stuff under the ground, and you know, all the class leading systems and people you have in place. That's marketing wiz at the end of the day. It's not going to help you protect and then help you develop the project in such a way that is genuinely value creating, not, not just in, economic terms, but obviously in triple bottom line terms, to sort of come full circle.

[00:23:23] Sean: Jack Cunningham. That was very, very interesting as always. Thank you so much for your time. And thank you very much for joining me.

[00:23:29] Jack: Absolutely pleasure, Sean.