Paul Polman: Embedding ESG in Business is the Right Thing to Do

In a fireside chat at Nomura Investment Forum Asia, Paul Polman, Co-Founder and Chair of IMAGINE, a social venture that galvanizes business leaders around the UN’s Sustainable Development Goals, said embedding ESG throughout business is not only badly needed, it’s the right thing to do. Mr. Polman, who led Unilever as Chief Executive Officer for a decade until the end of 2018, also spoke about the dual crises of runaway climate change and gross inequality, the need for greater commitment on climate action, and the role of ESG investing.

Climate change

Climate change and inequality are the two biggest issues we face today, said Mr. Polman.

Climate change poses a serious threat to our people and planet. The world is increasingly looking to businesses to play a greater role to mitigate its effects.

Mr. Polman said that we are “stealing from future generations,” having reached Earth Overshoot Day on August 22 last year, which marked the day when humanity’s demand for ecological resources exceeded what Earth could regenerate in 2020. Citing high levels of overconsumption, the cutting down of rainforests and the dramatic decline in animal populations, Mr. Polman added: “It is clear we cannot have infinite growth on a finite planet.”

People are also feeling more vulnerable due to widening inequality and poverty. The Covid-19 crisis has exacerbated risks and vulnerabilities that had been building in the global economy, he noted. As a result, citizens are understandably demanding more from governments and companies.

Yet, all is not lost, he explained. 2020 marked a turning point in tackling climate change. The pandemic spurred accelerated action on global warming, including more aggressive carbon reduction targets, employee activism influenced positive change in companies, and citizens made their voices heard at the ballot box or in their preference for buying brands well-positioned towards the future.

He also saw the move toward the decarbonization of world economies as a positive outcome of the pandemic. “65-70% of the world’s governments have made net zero commitments, with the Biden administration stepping up efforts in the US and countries in Europe launching initiatives like the Green Deal. Japan has made a commitment to cut carbon emissions by 46% by 2030, and to reach the net zero target by 2050.”

Sustainable financing at a tipping point

Sustainable finance is integral to tackling the climate crisis. “88% of investors globally place climate change risks at the top of their portfolio concerns,” said Mr. Polman.

The take-off in ESG investing, both in terms of the enormous amounts of money being channeled into it and the growing number of investors incorporating ESG into their investment decisions, underscores this trend towards portfolio decarbonization. This is not surprising given that “81% of these investments have outperformed their benchmarks. Very few alternatives to ESG investments have outperformed,” he said.

Mr. Polman also stressed that increased shareholder activism has made companies and their CEOs act on ESG. The ‘S’ in ESG has moved higher up the agenda, not only with respect to race and gender, but also human rights, social protection and job security. “Companies that work the ‘S’ very hard are rewarded, and increasingly so by the financial community,” he said. The flip side is that financial markets are starting to punish companies that do not take care of people in their value chain, he said.

Setback to Sustainable Development Goals

The pandemic has set us back 15 to 20 years in achieving the Sustainable Development Goals, Mr Polman said. However, we have the opportunity between now and 2030 of realizing “$12 trillion in economic benefits and creating 380 million jobs a year – at a time when we need them the most.” He outlined four priorities including:

Overcoming the pandemic and strengthening our health systems

Restoring growth and delivering the jobs of the future

Confronting the issue of inequality and fostering social cohesion

Addressing the immense threat of climate change and environmental degradation

He is optimistic that these issues will be resolved for several reasons: new technologies are emerging to help scale solutions; the costs of inaction are now higher than the costs of taking action; and global standards setting will help to unlock trillions of dollars of investments in the most sustainable companies.

Making a “net positive” impact

Mr. Polman believes companies should strive to be “net positive”. Net Positive: How Courageous Companies Thrive by Giving More Than They Take, is his upcoming book co-authored with Andrew Winston.

Net positive is the concept that companies take responsibility for their total impact or footprint across their entire value chain, rather than only for their operations. Companies must demonstrate they make the world better for all. This is a redefinition of performance and value creation that goes beyond financial returns to include social and environmental returns. Businesses must move from CSR to being responsible social corporations.

“Too many companies feel they can outsource their value chain and also outsource their responsibilities. That doesn’t work anymore,” said Mr. Polman. To have a net positive impact, companies must adopt a truly multi-stakeholder model, optimizing the return to stakeholders and in the process maximizing the return to shareholders. He emphasized the need for companies to put purpose at the core of their business models, where shareholder returns are the result of what they do, and not a “myopic objective or focus of what you should be doing.”

Net positive companies are those that work on system-level transformations such as taking bold climate action and reversing biodiversity loss. These companies do not simply play it safe. They play to win.

Investors are increasingly rewarding these firms with smart investment choices. “Ultimately, it will be the financial markets and the allocation of capital that will decide if we’re going to move at the speed and scale needed to make progress on humanity’s biggest challenges,” he said.

To watch the full presentation, visit the Nomura Forum website (requires guest login).