Path towards ESG in business endeavours: Understanding the basis and basics

Traditionally, a company’s core object is to generate enough profit and grow its owners’ wealth (shareholders’ value).

Of course, every business, unless it is not-for-profit, is established to make a profit to justify the investment made by its owner(s) in it.

Any miss of this goal is likely to have investments in the firm withdrawn by its owner(s) before it starts to collapse and wind up. 

However, before a business makes a profit or succeeds in its operations, several stakeholders act for, with, and on behalf of, the firm leading to the achievement of this goal.

These stakeholders have varied interests that need to be satisfied in one way or the other.

These individual interests often conflict with the interests of the firm. 

In this write-up, firms are classified into four groups depending on their ethical stance aligned with environmental, social and governance (ESG), and economic responsibilities in their operations.

Profit making

Group One: The first group includes those firms that operate on the premise that businesses exist solely to make a profit in order to ensure wealth maximisation for their shareholders.

Firms’ sole focus is to make profits as much as possible without regard to the interests of other stakeholders.

Employees could, therefore, be asked to work beyond the stipulated time or perform other tasks outside of their mandated schedules.

These could result in breaches of laws that are unethical.

Group Two: Firms in this group operate on the premise that though their main objective is to maximise owners’ wealth, they also have the mandate towards the satisfaction of other stakeholders’ interests with the belief that this action would inure to their [companies’] benefit in terms of enhanced reputation and then profitability in the long run.

Firms in this grouping demonstrate ESG consciousness but with a self-interest motive (enhanced future profits).

They thus, behave more ethically than those operating solely for profit.

Group Three: This group of firms operate with the belief that their existence as corporate organisations is a result of the existence of other stakeholders as well.

On that premise, such firms pay particular attention to the satisfaction of the interests of other stakeholders just as they pay attention to their quest to make profits.

The firms are, thus, focused on ensuring that the environment, social and governance (ESG) concept is adhered to, to the best of their abilities.

This results in an enhanced reputation, which could lead to increased revenue and then increased profitability in the long run.

They pay attention to ethical standards and thus, are environmental, social and governance-friendly companies.

Group Four: These are the ‘Shapers of Society’.

These are firms that operate on the premise that they have an obligation towards the larger society by ensuring they behave ethically to the highest level.

They believe that profit motive, and for that matter financial objective, should not be their primary focus but rather a secondary matter.

By this, they are creating equal opportunities for all stakeholders.

This group demonstrates high ethical behaviour by embracing the ESG concept, in addition to the economic benefits it brings to society.

In this circumstance, such organisations place much emphasis on the safety of the natural environment, ensuring social equity, and holding on to corporate governance ethics to the highest standard.

The ESG Concept

ESG is an acronym, which stands for environment, social and governance.

The concept of ESG is being used nowadays more often than the much-known corporate social responsibility (CSR) though they are similar in terms of ideas.

The International Sustainability Standards Board (ISSB) has given the green light for the adoption of the ESG concept in financial reporting, and has issued two reporting standards in that regard, namely International Financial Reporting Standards on Sustainability 1 and 2.

These are IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2 Climate-related Disclosures.

They are intended to guide firms as to how to report and disclose related information to primary users of financial statements.

The effective date for the implementation is January 1, 2024 onwards.

The ESG could be a vehicle through which firms could tailor their strategies such as having environmental strategies, social strategies and governance strategies, which would, undoubtedly, inure to their benefit in the long run.

Natural disasters mitigation

A firm’s environmental strategies could be tailored towards ensuring that any adverse effect of its operations on the natural environment is curtailed.

Also, it could take strategic measures aimed at mitigating the effect of natural disasters on its operations, and also take measures that would protect the environment.

Social strategies of a firm could be towards its employees by crafting flexible working conditions and acceptable remuneration.

A firm could give preferential treatment to members of the community in which it operates in terms of employment, or provide social amenities for the community.

Suppliers and other stakeholders of the firm could also be catered for through the firm’s policies.

Strategies should also be developed so that firms’ governance systems follow well-structured formats, which should include processes, procedures and organisational structures.  

Firms are, thus, encouraged to take these steps in order to be socially and ethically responsible so as to reap the immense benefits that accrue with that tag.

• Charles Ekornunye Ansah is a member of The Chartered Institute of Tax Law and Forensic Accountants–Ghana (CITLFAG), email: ekornunye@gmail.com

• Stephen Mensah Dzodzodzi is a Chartered Management Accountant

email: stephenmensah2016@yahoo.com