What is ESG? Why does it matter for companies and citizens? And how can the private sector better address its imperatives? According to our research, these three questions reflect the breadth and depth of companies’ understanding of environmental, social, and governance (ESG) issues. We have encountered leaders that don’t even know what the acronym ESG stands for. Other corporations and firms view ESG as something akin to a compliance or public relations exercise. And some executives are highly attuned to its nuances and prioritize related stakeholder concerns.

At Veracity, our goal is to help ensure companies fall into this third category and become world-class leaders on ESG. Regardless of a company’s current understanding of or commitment to ESG concerns, we believe ESG is increasingly becoming an essential dimension of corporate strategy, due to more stringent regulatory requirements and heightened public scrutiny. Therefore, a company’s ESG policy and implementation merit the same rigor and understanding of context as other high-priority strategic considerations designed to unlock value or mitigate risk.

Local Context Matters

As a geopolitical risk and market intelligence advisory firm, we look at ESG matters through the same prism through which we look at all of our work: that understanding local context is paramount, particularly when doing business in challenging markets. In fact, our firm was established precisely for this purpose: to equip businesses to operate ethically and effectively in places where it’s not always easy or straightforward to do so.

Yet local context is missing from many ESG-related business decisions, as well as from the metrics, ratings, and rankings on which investors so frequently rely.

Whether entering a new market, appraising an M&A target, choosing a supplier, or vetting a prospective investor, the reliance on information that is incomplete and devoid of jurisdictional context leaves even the most well-meaning firms in the dark about whether their practices stack up with their own pronouncements, and whether their investments can truly make the environmental, social, or governance impact they intend.

Based on extensive client service in over 150 global jurisdictions, we believe political dynamics and stakeholder expectations in local markets should shape a company’s ESG policies and the amount of resources dedicated to their adherence. Failure to adequately understand and address local market issues can sink even the most promising initiatives, while adequate attention to them can reap tremendous benefits for investors and local stakeholders alike.

Our ESG Guiding Principles

To be truly attentive to ESG considerations–which, in reality, are the range of issues and stakeholders that can make or break an investment–we typically follow three guiding principles. First, social license is essential, and it must be earned and enduring. Second, clean inputs do not necessarily mean clean business. And third, you’re only as strong as the weakest link in your network or supply chain.

  • Gaining social license. A deep understanding of the stakeholder environment–political, community, regulatory, and media, among others–and their interests, considerations, and expectations is vital. On-the-ground insight is the only way of guaranteeing thorough comprehension of the local operating environment, and of developing the knowledge and relationships required to meaningfully engage with those in position to impact the prospects of an investment. The risks are all too apparent: a major wind farm project in Mexico fell through after investors failed to adequately understand local fishing communities’ concerns. Meanwhile, opportunities abound: an investor in Colombia that proactively engaged with Indigenous communities is building one of the region’s largest solar power projects.

  • Cleaning your inputs. A deep appraisal of impact investments is crucial to ensure that the rationale for those investments is not undermined by other probity concerns. In South Asia, a client looking at a telecommunications investment aimed at boosting digital access found that that the target company’s licenses may have been ill-gotten, obtained through corrupt practices and kickbacks to politically connected figures. This is one of numerous examples of a promising impact investment potentially thwarted by unethical underpinnings, with risks that could be uncovered only with an eye toward local norms and context, and knowing the right questions to ask.

  • Determining your weakest link. Supply chain audits can be daunting. A good place to start is to identify high-risk areas, and jurisdiction-specific considerations can help to narrow the focus and determine which suppliers merit a closer look. A client looking to source raw materials from Thailand recently approached us for help in understanding the local operating environment and any potential ESG pitfalls. The client had made ambitious commitments on sustainability and preventing Modern Slavery, and was unsure whether and how it could work in a market rife with environmental degradation and forced labor. With an understanding of jurisdiction-specific ESG risks, and careful vetting of its prospective suppliers, the client was able to put necessary protections in place to uphold its commitments and legal obligations, and to avoid charges of greenwashing.

World-class firms are addressing ESG issues through the prism of these three principles, demanding thoroughly researched, industry-tailored, jurisdiction-specific insights to inform strategy, manage risk, and thrive in challenging markets. Their own future, as well as that of broader society, depends on it.

Jay Truesdale is CEO of Veracity Worldwide and Benjamin Weiss is Managing Director and ESG Intelligence Practice Lead. This article was adapted from Weiss’ discussion with Veracity Worldwide Senior Advisor Ambassador Paula Dobriansky at the Concordia Americas Summit 2022 in Miami. Video of the interview can be viewed here.