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LRQA: The Future in Focus

Welcome back to the Future in Focus podcast, or if you’re new here, welcome. In today’s episode, we speak to Ian Spaulding, Chief Growth Officer at LRQA as well as founder and former CEO of ELEVATE, an industry-leading sustainability and supply chain services business acquired earlier this year by LRQA.

During this episode, Ian talks about ESG, or Environmental, Social, and Governance. What is it, why has it become such a mainstream topic , and how do businesses leverage ESG to demonstrate trust and transparency to their stakeholders?

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With ESG being such a dominate theme in the media today, can we start with your understanding of what ESG is and where it originated?

Yes. So first off ESG is not new, it’s been around for quite some time but it’s been called something different. In fact my career largely tracks with the emergence of ESG as going into the mainstream about 25+ years ago I think we used to call it ‘Business Ethics’ and there were certain environmental initiatives that were under way and a lot of private sector companies began to implement codes of conduct, ethics programmes, management systems to really try and address issues of integrity or ethics, corporate compliance programmes or environmental performance.

That has since evolved and expanded and now ESG really is mainstream. I think the vast majority of companies have an ESG strategy programme so they can actually be a positive impact on society and ensure that their sphere of influence of their operations are actually moving the ESG ball forwards.

So it is a hot topic but it’s not new, it’s evolved, it’s got more complicated over the years but todays definition of ESG is inclusive of a variety of governance related topics that include effective management systems ethics and compliance like in the beginning of ESG, as well as the environmental initiatives to help companies identify science based targets for carbon reduction or greenhouse gas emissions and also more social issues relating to diversity inclusiveness supply chain related topics. So it’s evolved, it’s expanded but it’s definitely here to stay.

So why do you think ESG is such a mainstream topic now?

Well I believe one main reason is I think there’s a recognition that we have some very large global challenges in society whether it be the climate crisis, the environmental challenges that quite honestly governments cannot solve by themselves, they need private sector actors to address. In addition to that we know that there is a lot of hope that when all stakeholders come to the table to further these ESG topics then we might actually have a chance in solving these issues and addressing them because they’re much bigger than one country, one government or one company etc. So it’s kind of a everybody needs to do their part to address these ESG issues.

Now there’s also other reasons why it’s more mainstream. Financial institutions and governments are certainly regulating, financial institutions are also ensuring that they’re not lending money to companies that are going to use that money that are against their ESG objectives or goals. And so when you bring in the bankers and you bring in the regulators obviously that makes ESG even more mainstream than what it was 10, 15, 20 years ago where it might have been driven more from a reputational perspective or how do I distinguish myself in a crowded marketplace.

Now it really is a licence to operate, how do I ensure I’m in the game, I’m doing the right things in order to appease regulators, appease shareholders and the financial community, but also customers as I demonstrate I’m one of the stakeholders that is pulling his or her own weight to address these quite significant ESG topics.

And how do businesses leverage ESG to demonstrate meaningful actions to stakeholders?

Well I think a lot of it is how do they actually set targets, what are those targets. You can’t just say we’re going to do business as usual we have to set some targets and reducing carbon emissions, improving performance, addressing risks in the supply chain or in your operations, trying to further diversity goals, inclusiveness goals etc.

And so I think with companies setting those targets they obviously need to implement initiatives, interventions to address them and to ensure that they meet those targets and then lastly, to report publicly on their performance. Now that’s super important because companies are able when they do that, they’re able to actually demonstrate to the world that they are meeting these sorts of international objectives.

So I think that’s ultimately, I mean this is in essence a management system framework that companies have adopted to further ESG objectives and I think a lot of companies, world class companies they’re doing a great job in addressing many of these issues which are quite complicated. I mean these are not easy issues to further in your operations because they often actually require investment, require management time and commitment to address it, trying to influence stakeholders including regulators, suppliers and others, and even consumer behaviour in some respects. But those are some of what companies are doing in order to leverage ESG to achieve their self-reported targets or even the targets that are set by the international community through legislation or other actors.

Can you tell us about the role of assurance in ESG?

Well assurance plays an important role because a lot of stakeholders and consumers may not trust the private sector or companies as much today as they might have 20, 30, 50 years ago and in fact there’s a decline in trust in the private sector as there is a decline in trust in the public sector and even activists are NGO’s. As a result of that, I think companies in order to demonstrate that they’re actually making meaningful progress, they have wanted to report publicly on the targets and their progress against those targets.

But it’s not just enough to report on it, often companies want to demonstrate just like with financial reporting that they’ve had some type of independent verification, independent assurance through firms such as LRQA to verify that they meet certain standards or that they’re making progress in achieving those standards.

And can you tell us about the role of ESG in global supply chains?

Many companies are struggling with their ESG in supply chains. I think they feel it’s easier to further your ESG objectives in your owned and operated facilities or buildings or operations in general. But when you extend those mandates if you will to the supply chain, I think a lot of companies realise it’s a much more complicated world.

They’re talking about working with suppliers in a variety of countries around the world, companies they do not own and operate but that they just contract with. So a lot of what companies have done to further ESG within their extended supply chain is getting suppliers to adhere to their standards. So in other words, promulgating a code of conduct, that standard on carbon reductions or supplier ethical performance etc. and then to perform some type of due diligence. Don’t bring in bad actors, work with actors in your supplier chain to make them better, to encourage them to be better and then ensure that you’re using your pocketbook, your purchasing decisions, your procurement process in order to reward suppliers who are meeting their ESG objectives and penalise suppliers who are not. That’s ultimately how many companies have helped to extend ESG throughout their subcontract supply chain.

And you’ll read about it with lots of progressive companies that have got greater disclosure on which factories they do business with, they’ve actually been transparent in reporting about it publicly on who they are, they’ve actually even shared audit reports or third party independent reports on their performance on meeting issues such as social and environmental performance. And then ultimately demonstrating the impact that comes from ESG in the supply chains in terms of reduction of working hours, improvement of wages, elimination of child and forced labour etc.

There’s lots to digest around ESG, how do businesses keep up if regulation is constantly evolving?

Well my advice for companies is recognise that ESG is here to stay, more and more governments are in the game, they will in fact raise the expectations on what companies are required to do. We’re moving from historically a voluntary ESG agenda to a mandatory ESG agenda, whether it be the OECD guidelines, the European Union requirements, the US government, Australian government, UK government, these are all governments that are getting in the game and requiring companies to set standards, perform better due diligence and improve their ESG performance. So let’s just recognise that’s not going away, it’s here to stay.

So companies need to act, they need to begin to take a fresh look at everything they’re doing. What standards do they put in place, what targets have they set, have they staffed their internal operations effectively, are they identifying the ESG risks effectively and more importantly are they doing something about it. Are they bringing about change to ensure they’re managing those risks, if the answer to that is yes, then I think no matter where the law goes, no matter where the regulations go, these companies have the management system that’s in place to identify and manage those ESG risks and how they’re evolving in the future.

So if they don’t have those systems, the people, the resources, the tools at their disposal then I think they’re going to continue to find that they’re getting hit with the campaign, they’re finding they do not have access to sell into certain markets, they’re getting penalties by governments or financial investors etc. that say there’s higher borrowing costs as a result of your poor ESG performance. So there’s a bit of a carrot to encourage companies but there’s more of a stick if they don’t manage these issues and that stick is getting used by regulators more and more as they try and use their influence to drive the private sector to do more to address these very large ESG topics that all of us need to take action on if we’re ever going to solve some of the global issues that I think all societies are struggling with.