Thoughtful frameworks allow companies to account for the political risks inherent in any ESG activity (or inactivity) in the years ahead.-By Robin Byrd
There was a time where a company’s political leanings were of no practical importance. Similarly, national political movements largely stayed out of corporate affairs, leaving the business world to manage itself. Said no one, ever.
While it does feel as though political risk is an emergent threat for modern businesses to manage, the reality is that these risks have existed since the dawn of time. Being on the wrong side of powerful political figures… misjudging a trending belief… or being surprised by a military move that upends expected outcomes for a particular venture…well, it’s not just something from business history. That’s human history in nutshell.
Yet rather than proving a depressing point, this should provide hope. Even more than hope, humanity’s long history of surviving tumultuous times means that there’s valuable guidance to be gleaned from the past. Building on history, centuries of managerial study, and the latest insights from top consultancies and academic groups, modern businesses can turn to the frameworks discussed here to determine how to move forward with the goals they value even in today’s remarkably volatile and uncertain political climates.
It’s tempting to try and silo political and/or geopolitical risks. On paper and in theory, this makes things like a trade war or closed border into “just” a supply chain issue. Similarly, practices around gender recognition and inclusion might be labeled as “just” HR issues. Yet that’s rarely the operational truth. Thus, while ESG strategies may be championed and advanced by the most senior levels of an organization, the consequences of those strategies need to be a part of the conversation throughout the organization.
For a simplified example, consider Starbucks. A part of the corporate strategy was that all locations should adopt an “open bathroom” policy and be a non-discriminatory, welcoming “third space” for the community. However, front line staff in certain geographies voiced concerns that their stores were becoming unsafe for patrons and staff as bathrooms became injection sites for addicts. A risk assessment at one level of the organization hadn’t accounted for risks at another level, and Starbucks ultimately closed 16 locations in 2022 due to persistent safety issues related to their open bathroom policy.
Part 2: Develop A Strategic Approach To ESG Implementation
Starbucks could have done more, before implementing their policy, to understand the longer-term strategic impacts of their action. It’s the same in other firms. As risks are surfaced and discussed, ESG champions need to develop a strategic approach to implementation that accounts for both high level and frontline risks. This approach needs to include the belief or corporate value underpinning the move, and what the company is willing to do to back their implementation in the face of worst case scenarios.
It may seem pessimist to start implementation discussions by asking, “What’s the worst that could happen to us, and what will we do when it does?” And yet, this is the reality companies face. For while it is easy to blame large macro economic or geopolitical situations for problems, research from Ernest & Young notes that even in the midst of broader cultural upheaval, its often very specific “worst case” situations that cause major problems for companies.
For example, consider Adidas. Not long ago, they had one of the highest grossing sneaker brands in the world, created by one of the most iconic fashion designers of the era. Then, Kanye West’s tweets and media remarks made an ongoing partnership impossible, and Adidas pulled his Yeezy brand from the shelves. Now, they have $1.2 billion in unsellable sneakers, and a plummeting stock price to boot. Many firms would be scrambling to adopt new marketing tactics, but Adidas is willing to take the financial hit in the service of their larger reputation and corporate beliefs. It’s an expensive move, but it aligns with their strategy about who they are and how they go to market.
Part 3: Review The Strategy Regularly To Adapt To Emerging Risks
Once an approach to ESG has been through an initial risk assessment and implementation planning session, that approach needs to be regularly reviewed and updated. One of the biggest risk areas, after all, is the risk of being surprised.
Now, some situations do come out of the blue, but those are truly rare. Most of the time what companies face are simmering situations, especially in political circles. They can’t be “solved” once and for all, because they represent evolving scenarios. Thus, firms need to hold aside time on a regular basis for an ESG risk review.
Key questions to ask during this review time should be focused on changes to the situation and speed of implementation. New government in town, or a new regulation in play? What needs to change about the plan? Implementation of certain policies too far behind industry peers… or too far ahead of the market? What can be changed in day-to-day tactics?
Concluding Thoughts
It can feel like everything has gone political of late, with a 24/7 news cycle and the potential for non-stop attention on a company’s tiniest actions (or inactions, as the case may be). Yet throughout history, conducting business has been rife with political and geopolitical risks. It’s part and parcel of the human experience.
To navigate the present moment, companies can take cues from the past. Listen to all levels and all departments when forming policies – it’s not always possible to see every risk accurately from the top of the corporate hierarchy. Be intentional and strategic about living out ESG values that are sincerely held – and be willing to take financial hits of today to keep on the right side of history. Then – and most crucially – regularly review plans and risks eliminating, as much as possible, the element of surprise. It requires vigilance and extra effort, but it is the time-tested way for firms to stay afloat in a highly politicized world.