ESG: An Emerging Cornerstone of Trust in Today's Enterprise

April 13, 2022 Bernadette Bulacan

In our first article in this series, in which we looked at the findings of the Building Trust in Business Relationshipsreport from Economist Impact and sponsored by Icertis, we examined what trust is and how it is built, as well as some of the challenges organizations face in building trust with partners and customers.

With this second piece, we want to focus specifically on the role that environmental, social, and governance (ESG) issues play in building trust within a business context.

ESG initiatives have quickly become strategic imperatives for many companies and critical differentiators for many businesses looking to gain a competitive advantage in the marketplace, build brand loyalty, and attract and retain talent within their organization.

As laid out in the report, executives believe that high levels of trust between businesses can be beneficial to long-term revenue growth and achieve sustainability goals. As ESG reporting becomes more central to a growing number of companies, ESG compliance will help generate trust between businesses while simultaneously building customer loyalty.

The majority of survey respondents see the visibility and transparency of supply chains as means to achieving sustainability targets and building trust in business partners.

But, as the study revealed, there remain gaps between the steps executives see as enhancing trustworthy business relationships and the efforts their organization has taken. Areas like expanding the number of dedicated ESG compliance staff or investments in new technology that enables the fulfillment of contractual obligations lag expectations overall.

How ESG Can Drive Trust in Business Relationships

As discussed in our previous article, companies build trusted business relationships primarily due to their beneficial effects in achieving financial success.

As noted in the report by Dr. Isabel Cane, head of the OECD's Trust in Business initiative, businesses want to demonstrate that they "bring social value, practice inclusive growth, and develop a responsible form of capitalism. And one of the ways to demonstrate that is through who you partner with and who you cooperate with."

Alongside financial success, companies are increasingly discovering that promoting trust in their relationships can be beneficial for achieving sustainability goals as well.

The Economist Impact report highlights a growing consensus amongst those surveyed that trust built through meeting pre-agreed goals, such as sustainability targets, leads to an organization's overall "market competitiveness, raises productivity, aids the recruitment and retention of talent, and, ultimately, secures long-term revenue growth."

Indeed, 36% of executives surveyed for the Economist Impact report said that the boost to sustainability goals was one of the most significant benefits of high trust levels in business relationships, particularly related to internal company performance.

The Growing Demand for ESG Compliance

While ESG is a newer business performance metric, 73% of surveyed executives said demonstrating their corporate ESG commitments was a "high or business-critical priority" for their organization's senior leadership. More than three-quarters of those surveyed (76%) said that ESG reporting had grown in importance over the previous two years.

Likewise, almost half (47%) of the respondents said that their organization had identified investing in or developing their ESG commitments in 2022-24, rivaling the strategic importance of cybersecurity (49%) and digital transformation (48%) in their planning.

Shareholder and business partner pressure in favor of ESG goals is also growing. Respondents said that investors or shareholders (37%) and partners (34%) are increasingly pushing for progress on ESG commitments.

Combined with pressure from senior leadership, this growth of ESG importance for business leaders is due to pressure from below, as well. The Economist Impact report found that 74% of executives feel consumers and customers increasingly demand that organizations hold ESG principles and act upon them in meaningful ways.

An expert on trust in business, Natalie Doyle Oldfield, told Economist Impact that organizations face "greater scrutiny from a more informed and critical customer than ever before…They want to see a social conscience."

And customers will reward trust with loyalty. An Edelman study found more than 80% of respondents indicated trust in a company was a significant factor in purchasing decisions, and 60% would remain loyal to a trusted company even if a competitor launched. With only a third of consumers reporting they trusted the companies they bought from and less than 30% willing to remain loyal to a manufacturer they didn't trust, there is a clear advantage in being a company buyers can trust.

Organizational Management and ESG Reporting

The Economist Impact report highlights organizational management as a critical factor in building and maintaining trust.

Of business leaders surveyed, 89% believed it was important that their partners shared their organization's values, and nearly 40% had included their business partners in their long-term planning.

A 2021 study found that firms not only establish supply-chain relationships with like-minded companies "inclined to engage" in responsible social and environmental behaviors, but suppliers are often forced to improve their ESG conduct based on pressure from buyers. The researchers discovered that a "one-standard-deviation change in the customer CSR [corporate social responsibility] rating will generate about an 8% aggregate increase in [the] future CSR performance of [its] suppliers."

These findings aligned with survey results in the Economist Impact report, with respondents identifying their business partners as "the group most likely to drive improvements in both supply-chain visibility and transparency."

Where Companies Can Do More

When it comes to ESG compliance, the Economist Impact report respondents felt that they were doing well overall.

Nearly 60% said they outperformed peers on ESG strategy, with two-thirds (64%) feeling they were ahead of competitors on supply-chain visibility and transparency.

When it comes to implementation, however, the study found disconnects.

Seventy-five percent of respondents recommended employing dedicated ESG compliance staff, yet only 15% did so. Similarly, 72% of respondents recommended adopting new technology to track progress or enable reporting processes, yet only 22% had done so. More significantly, 70% of respondents believed in aligning ESG goals with overall business strategy, but only 43% had taken such steps.

Similarly, business executives have yet to harness the power of their contracts to build and maintain trust, especially around ESG reporting. Just a third of respondents had embedded ESG obligations into partner contracts, and only 5% had terminated a contract based on misalignment with ESG goals by a partner. We'll have much more to say about the power of contractual obligations to build and maintain trust in our third installment of this series.

Conclusion

With ESG compliance becoming a more critical element of business today, companies must do more to cultivate how partners and customers alike perceive their brand’s trustworthiness and commitment to ESG goals and ideals.

Improving the visibility and transparency of supply chains, embedding ESG requirements into partner contracts, and hiring dedicated ESG compliance staff will boost partner and consumer trust in a company, provided that deeds follow words. The gaps illuminated by the Economist Impact report where implementation is concerned need to be addressed. By doing so, companies that are seen to walk the walk will be able to successfully build customer loyalty while at the same time fostering trusting business relationships, both of which will ultimately serve to bolster the bottom line.

To read more, access the report here.