Corporate Governance in the Post-ESG Era

IBREI
3 days ago
6 min read

I write this first article of 2023 still under the haze raised by the Americanas case, but no longer numbed by the shock of the first days that followed the disclosure of the most significant corporate governance scandal of the post-ESG era.

Expect to hear about this case endlessly in the coming years. The modest accounting hole of R$ 47 billion, “ignored” by the company’s three main shareholders, will become a negative case study in classrooms and sustainability conferences, just as the collapse of Vale’s dam in Brumadinho has served as a counterexample in recent years — much like the frauds of Enron, WorldCom, and Parmalat, and the shamelessness of mega-investor Bernie Madoff (see on Netflix the series “Madoff: The Monster of Wall Street”). Episodes like this are wounds that do not heal easily. Institutional scars create paradigms.

For the purposes of this article on trends, the Americanas case (a disaster in the “G,” with severe impacts on the “S”) lifts the lid and spills out issues that should become central concerns for the actors in Brazil’s ESG landscape. Beyond that, in the broader arena of debate, it inspires important reflections on the type of capitalism we are willing to accept.

If there was already chronic distrust in society regarding corporate transparency, it is likely to become acute and grow exponentially. It will shift from “a nagging suspicion” to full alert, pressuring companies, industry associations, rating agencies, certifiers, and award curators to apply far stricter standards. The blow was heavy. Not only because it came from one of the world’s largest retailers (ranked 222nd in “The World’s Most Powerful Retailers 2022”), a darling among investors. But because it exposes the fracture of an entire flawed system and the often cynical relationships that sustain it.

Expect 2023 to bring deep revisions with Shakespearean density. A nearly psychoanalytic dive in search of existential answers. Institutions such as Brazil’s Securities and Exchange Commission (CVM) and B3 (especially its Corporate Sustainability Index) will certainly seek to be more cautious in their assessments of ESG practices among Brazilian companies. Fund managers will need to be more diligent when selecting corporate assets with strong ESG scores, relying on ratings grounded in more precise data and consistent methodologies. Companies truly serious about sustainability will be more careful in choosing their auditors (yes, Americanas’ financial statements were audited!).

If they do not wish to become complicit in irresponsible and predatory business models, boards of directors will demand greater transparency from CEOs, question exorbitant executive salaries and bonuses, and scrutinize decisions that harm people and the environment. They will pay closer attention to the fine print of financial statements whose numbers they know — or should know.

It is worth remembering: Americanas was part of B3’s Corporate Sustainability Index, a portfolio of supposedly more sustainable companies. In this B3 “rating,” it held a privileged position: the 12th highest score among 70 companies. It had the market’s seal of approval and a “sustainable company” image endorsed by what, in less liquid times, we used to call “opinion makers” — in 2022, the company even won Exame magazine’s award as the best ESG performer of the year (believe it or not!) in the Wholesale, Retail, and e-Commerce category.

Stories like Americanas — which only thrive in the limbo of old shareholder capitalism — add extra spice to the arguments of ESG skeptics.

The anti-ESG wave, unsurprisingly, has been stirred up in recent weeks. I am not referring to U.S. Republicans challenging ESG to defend oil producers worried about competition from renewables. I am referring to many Brazilians who see ESG as a smokescreen for companies to hide misconduct; a pretty mask to disguise weak commitments to ethics, people, and the planet.

I have spent much of the past two weeks responding to emails from friends convinced that the Americanas case would mark ESG’s final breath. No, of course it will not. ESG is a means, not an end.

It is a response from millennial investors to the contemporary need — thankfully recognized in the 21st century — for responsible, transparent, purpose-driven companies that are better for the world. According to Infosys’ global study (ESG Radar 2023), ESG investments are expected to reach US$ 53 trillion by 2025 — one third of global assets. About 90% of business leaders surveyed recognize that ESG delivers positive financial returns, often within two to three years (41%). Every 10% increase in ESG spending results in 1% profit growth.

Blaming ESG for a scandal like Americanas is as reckless as blaming a knife for violence rather than the person who uses it with intent to harm. It is as naïve as thinking that unfair play in football is caused by the rules — which, on the contrary, promote fair play.

Six recommendations for those who want to practice real ESG

There is no need to be a trend analyst to anticipate what lies ahead: stakeholders will be far more critical about the coherence between what companies and market actors say and what they actually do in ESG.

If you are a business leader aspiring to truly operate under ESG principles, I recommend six moves:

(1) balance actions across all three dimensions (ESG is not only about the environment, much less only about climate; identify the key social, environmental, and governance issues that may impact or be impacted by your business);

(2) develop a strategy and treat it with the same care as major corporate decisions (either ESG gains strategic status or it will not change how the company thinks and does business);

(3) make public commitments that express necessary transparency to stakeholders;

(4) set ambitious goals consistent with the scale of your company’s impacts;

(5) choose precise metrics (many are available in the market);

(6) implement action plans aligned with the challenges set in your goals. Otherwise, you risk doing the bare minimum or suffering painful missteps.

Twelve ESG topics on the rise

A message to ESG managers: among the trending issues for 2023, here is a basic list of twelve items that should be on your radar:

(1) climate change and decarbonization (companies will remain challenged to build feasible Net Zero targets);

(2) diversity and inclusion (the next step is integrating policies into global talent management strategies);

(3) mental health (companies will continue supporting employees with prevention programs);

(4) strategic private social investment (initiatives must generate real impact in communities and territories);

(5) sustainable procurement policies (full sustainability targets cannot be met without engaging supply chain partners);

(6) third-party public accreditation of processes and impacts (to ensure credibility and overcome rising distrust);

(7) stakeholder mapping and strategic engagement (to manage expectations before gaps turn into value-destroying crises);

(8) growth in ESG committees with external members;

(9) greater focus on biodiversity preservation;

(10) increased investment in sustainability innovation;

(11) expansion of financial tools such as sustainability-linked bonds;

(12) purpose statements and embedding ESG into business strategy.

Sustainable leadership on the rise

My less obvious bet is that the Americanas case will accelerate two important discussions in Brazil that have not yet been fully addressed by companies interested in ESG. Both are structural. They relate to the “G” dimension of Governance. And, in my view, they determine the success of any ESG strategy.

The first concerns the urgency of a new type of values-driven leadership, supported by business thinkers once considered “alternative” but now increasingly influential, such as Richard Barrett, Raj Sisodia, and Frederic Laloux. The second, closely linked to the first, is the premise that there can be no effective ESG strategy without an organizational culture guided by ESG values.

It may sound abstract. It is not. Business decisions are no longer neutral, isolated, purely technical acts as they once were. And this expectation grows alongside millennials’ new definition of business success.

Business decisions are fundamentally human acts that can improve or worsen the lives of people and the environment. The possibility of worsening them is far less tolerated than it once was. Therefore, businesses that are better for the world will increasingly require conscious, empathetic, transparent, inclusive, and ecocentric leaders. Leaders with a humanized profile that represents the exact opposite of the trio who led Americanas.

Among the many criticisms directed at them is an obsession with results at any cost — tolerating delayed payments to small suppliers while granting colossal bonuses to executives lacking transparency.

In contrast to such practices, sustainable leadership — a new civilizational step — is likely to gain momentum. Perhaps less because of awareness of its virtues, and more because of the growing conviction that the vices of outdated shareholder capitalism represent new risks.

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