“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world” – Archimedes
Sri Lanka’s economic crisis continues to attract international attention. While the majority of analysis has focused on macroeconomic policy, some of the more misguided commentaries that have emerged seek to scapegoat our nation’s strong performance on Environmental, Social, and Governance (ESG) rankings as being responsible for our ongoing economic woes.
While ESG is much broader than just a quest for lowering emissions, its criticism has mainly been directed at the ban of fertilisers and agrochemicals, which some claim is an ESG strategy run amok. But is this claim legitimate?
In order to test the merits of this ‘ESG backlash,’ it is important to first understand how these practices emerged. Prior to the 1990s, the traditional measurement for evaluating the strength of a company was purely in terms of how much it could earn for its shareholders. Increasing that value was the sole priority.
It soon became clear that long-term success was also contingent on non-financial factors, first described in publications like John Elkington’s book ‘Cannibals with Forks: The Triple Bottom Line of 21st Century Business,’ which recommended an alternative calculation that included environmental and social factors.
Over time, this broader concept of the triple bottom line (profit, people, planet) evolved into corporate sustainability and Corporate Social Responsibility (CSR). With each evolution, the interventions of companies became less ad hoc and more focused.
This gave rise to scepticism and allegations of ‘greenwashing,’ given that the drive for profits has historically been seen to be at odds with moral, ethical, and environmental concerns. Business is incorrectly perceived to be separate from society, whereas in practice, business is made up of leaders, employees, and value chain partners across diverse segments of society.
The ABCs of ESG
ESG reporting and targets were an effort to respond to these concerns with a movement toward a global common approach to governance policies, measurements, and definitions, in order to build a credible framework for analysis and action. This is aimed at ensuring that all the talk around ESG actually translates into meaningful action and real accountability, pushing companies towards being proactive.
A proper ESG strategy pre-emptively measures and transparently discloses risks and opportunities around environmental and social impacts and key governance issues. This includes reporting on mitigating strategies and their effectiveness.
Those who are able to respond effectively to these long-term concerns are not just virtue signalling. They are making the case for their long-term stability to investors, supply chain partners, regulators, and most importantly, consumers. To do this, companies have to develop their own ESG roadmaps which build in clear, phased targets across all three pillars.
When done correctly, ESG-focused corporates identify emerging opportunities that drive value for all stakeholders and financial performance too will strengthen. Research shows that businesses that invest in ESG outperform nearly nine in 10 (88%) companies, with strong sustainability practices demonstrating better operational performance, ultimately translating into improved cash flows.
Compliance is necessary to compete in a global marketplace. This is due to the combination of consumer awareness of ESG-related issues, stricter national and regional regulations, and the wave of companies around the world now rapidly forging ahead with ESG-driven strategies and like-minded partners. Those who fail to act risk being left behind.
From this perspective, integrating ESG, especially for smaller economies like Sri Lanka, could potentially enable a countrywide ethical, sustainable, climate-friendly positioning.
Drawing from our own experience, the ESG strategies and targets contained in the Hayleys Lifecode are empowering all 16 business sectors of the Hayleys Group to align and harmonise their short-, medium-, and long-term strategies. This drives sustainable actions with the potential for greater impact across all key economic sectors contributing to our nation’s GDP.
For example, increasing the utilisation of renewable energy to lower operating costs while reducing the carbon footprint of our manufacturing in line with the Group’s environmental targets to attract global export buyers. Leveraging our smallholder-based social enterprises enables sustainable sourcing of raw materials for value-added exports while enhancing prosperity and standards of living at the grassroots.
Similarly, the adoption of integrated reporting, science-based targets, and improved transparency in supply chains enables stronger governance frameworks. By measuring and disclosing our actions in this manner, we ensure that our efforts on the environmental and social pillars are credible and impactful. A true ESG focus must prioritise the governance dimension, including the application of ethics, values, and transparency – a prerequisite for responsible corporate entities and a civic-minded society.
The key to success is not an isolated action, but rather, ensuring progress that scales up on each front simultaneously, to enhance competitive advantage, proactive risk management, and ensures our alignment with national and global priorities.
Taken from that perspective, perhaps Sri Lanka’s problem was not too much ESG, but too little?
Choliya De Silva
Group Chief Financial Officer and Head of Sustainability, Hayleys PLC