ESG hits the spotlight

Redwood Comment
Published:  23 September, 2020
Dr Mike Redwood

How long will it take before Boohoo and Rio Tinto recover from the outcomes of hitting global headlines for what can only be classed as management failures? Company analysts are talking in terms of three years at least. During this time, their share price will be depressed, many investors will stay clear of the company and stakeholders and customers will be wary before transacting with them.

Both companies made great play about their social responsibility and environmental duties. Boohoo sat high up in the rankings of companies preferred by investors for their Environmental, Social and Governance (ESG) scores, while Rio Tinto pronounced that their “teams – everyone from archaeologists and economic development experts to human rights specialists – work in partnership with our communities to understand how our work affects their lives, their culture and their heritage”.

Yet, the sacking of the Chief Executive of Rio Tinto and his senior management colleagues is a perfect example of the 21st century consequences of failures in governance in business today. All this because they blew up two caves that were amongst Australia's most important archaeological research sites with evidence of continuous human habitation dating back 46,000 years. This was in order to access £75m (A$132m; US$96m) worth of high-grade iron ore. Annual profits at Rio Tinto are measured in billions of dollars.

It was legally permissible for them to do this, although the significant archaeological discoveries came after the approval was given. The CEO subsequently told disbelieving Australian parliamentarians that he was unaware of this, although his senior executives were sufficiently knowledgeable to have had hired lawyers, “in case opponents tried to seek injunctions to stop them”.

Shareholders were clearly not impressed by these actions, nor did they think it enough to strip senior management of their multi-million dollar bonuses. The three most senior executives will now leave at the year end. The CEO, Jean-Sébastien Jacques, can hardly be surprised. On their website, he is quoted as follows:

“Today, as the world grows more complex, our stakeholders’ expectations are changing and growing, and spanning all aspects of sustainability - climate change to communities. For nearly 150 years, this company of pioneers has successfully navigated both challenge and opportunity - and succeeded. We are committed to doing so again in this new decade.”

History shows that with many aspects of environmental and CSR, management companies first adopt a very defensive position, then develop a charitable or philanthropic side before going on the offensive to promote their brand as sustainable, exactly as Rio Tinto does on its website. Often this is done without having put in place the necessary commitment that is needed all through the business.

In this regard, Boohoo has been no better. Its success has been built on the founder’s – the current Chairman - deep knowledge of the intricate workings of the textile industry, and it is very hard to believe they were unaware of the slave labour and subcontracting going on in the UK city of Leicester for the last few years. It has been extensively reported and any experienced industry executive should immediately recognise that the supply chain needed investigation. Why leave it to third party audit systems to be found wanting?

These columns have frequently explained the weakness of relying entirely on external audits, important as they are for accreditation and other matters. No company wanting to be certain about its supply can be without the skills and technology to inspect it personally and get to know and trust the people involved. The use of secret subcontracting has been written about as a major ploy to disguise the truth for two decades, and few experienced executives have not seen it. It is what is concerning so many brands in relation to Uighur workforces in China right now. Boohoo should be a world leader in this area, not a failure struggling to recover from errors.


Lack of skilled staff is an issue in the leather supply chain
Lack of skilled staff is certainly an issue in the leather supply chain, where personnel with scientific, technical and leather making knowledge is clearly too small. Both Boohoo and Rio Tinto did have the skills to know what was happening, but their governance was at fault in allowing it to happen, possibly encouraging it. We will never know.

It was in the United States where 180 top companies in the Business Roundtable first argued the need for a purpose beyond the pursuit of shareholder capital as laid down by Friedman in his essay “The Social Responsibility Of Business Is to Increase Its Profits” in 1970, and has been the dominant philosophy of much of business since. This new thinking moved CSR towards ESG, and the concept became more integrated into the structure and philosophy of enterprises. Yet, lately there has been a backlash in the US, just as the rest of the world has taken it on, with some influential groups arguing it to be illegal to damage pension funds income by not pursuing profit as the sole goal.

This polarisation is pointless as it is now clear that companies will have to move towards ESG, thinking to avoid the sort of risks which have caught out both Rio Tinto and Boohoo. The potential long term reputational and earnings damage consequent upon illegal or inconsiderate behaviour resulting from a narrow focus on short term profit does too much harm.

When a recent report from HSBC indicated that over 95% of companies were planning to improve their position on the ESG scales, the vast majority of the companies questioned made it clear that the initial pressure was coming from customers, but they are also aware that a failure to do so can lead to costly mistakes.

Mike Redwood
September 23, 2020

mike@internationalleathermaker.com

Follow Dr Mike Redwood on twitter: @michaelredwood

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