By Olga Hawn, Faculty Director of the Center for Sustainable Enterprise, and Assistant Professor of Strategy and Entrepreneurship at UNC Kenan-Flagler Business School
Environmental, social and governance (ESG) issues continue to grow in importance, and companies are facing unprecedented internal and external criticism and pressures to address them. Executives are left to wonder, “Should I respond to this issue, and if so, how?” and oftentimes note that addressing ESG issues before the company is being criticized in the news is an underrated strategy and a deliberate choice. Although managers increasingly face trade-offs when dealing with multiple ESG issues at once, we still know relatively little about the factors that influence which issues they respond to.
Our new research with Ioannis Ioannou (London Business School) and Rodolphe Durand (HEC Paris) seeks to unpack the variety of sustainability issues confronting companies around the globe and to examine the conditions under which executives respond to these issues more substantively. The project analyzes data from all available firms, regardless of whether or not they were covered in the media, across a large number of ESG issues.
We obtained our initial sample of companies from RepRisk, a Swiss-based business intelligence provider that uses a big data approach to systematically screen more than 80,000 media, stakeholder and third-party sources in 15 languages on a daily basis. These include print and online media (local, national, regional and international), NGOs, government bodies, regulators, think tanks, newsletters, social media (including Twitter and blogs) and other online sources. RepRisk’s methodology is issues-driven, rather than company-driven, which means that their database includes any company exposed to ESG risks, regardless of the company’s size, sector, country of headquarters or operations, or whether the company is listed (75% are not).
RepRisk identifies news that criticizes companies for 28 ESG issues, such as environmental degradation, human rights abuses and corruption (see Fig. 1). Considering organizational responses to these issues, we independently ranked 900 data items from an additional data source – Thomson Reuters ASSET4 – finding a match for 20 issues. Finally, we downloaded a number of firm-level and country-level variables from Bloomberg, Worldscope, Datastream and Compustat to control for unobserved heterogeneity.
So far, our research has found that companies respond more to media criticism related to ESG issues under four conditions: when they are criticized on a larger number of issues; when their peers are in the media for ESG issues, even if they are not; when they receive greater media coverage and more severe criticism by the media of wider reach; and when the issues are small in scale, local in scope, independent in nature and involve primary stakeholders (i.e., employees, shareholders and customers).
These findings are why I’m optimistic about sustainability. They show that our criticism does matter to push companies to do more! Companies listen – and not only when they’re directly threatened by the criticism, but also when their peers are criticized on a given issue.
Of course, managerial attention is limited, and some issues appear relatively more or less salient to managers. But our research shows that the number of peers criticized on an issue and the number of issues a company is criticized for in the media also influence organizational response. We believe this is due to two key mechanisms. First, if a large number of peers receives media attention on a particular issue, a company may strategically address the issue to prevent contamination and damage to its reputation, or to differentiate itself from its peers. This strategic decision (possibly leading to first-mover advantages) is part of the cost-benefit calculation, whereby the costs of not responding to the issue and the benefits of addressing it grow with the number of peers being criticized. Second, when a company is criticized by its stakeholders, the more issues it is involved in, the greater the reputational damage that it suffers, and the greater the need to cleanse its reputation and address the issue. Once again, the costs of not responding to an issue and the benefits of addressing it grow with the number of issues the firm is facing in the media.
Our journey to sustainability likely will always face obstacles. But as stakeholders who truly care about what we consume, who we work for and what we invest in, we do have the power to compel corporations to do better. Together, we can move the sustainability needle!