Social purpose: an essential ingredient for leading in volatile times

Views on ESG are neither stable nor uniform. They never have been, and they never will be. In one moment the framework appears to be nothing short of an ethical imperative. In the next it seems to be a passing fad. For some Canadian business leaders, the question has increasingly become not how to keep up, but whether the enterprise should be pursued in the first place.

In challenging times, and with a worrying economic forecast on the horizon, that latter inquiry has grown in appeal. Indeed, in recent months, ESG has come under explicit attack by conservative politicians and industry leaders alike, while many businesses have proposed to ignore the “S” entirely in favour of the measurable and promotable allure of pathways to net zero. What, then, should leaders make of all this? And what can be done to respond to and account for these dizzying and uneven developments? The answer is not to simply give up, nor is it to underestimate the social risk of “S.”

The foundational character of ESG is that it proffers no authoritative gospel, no singular choir book from which we might all collectively sing. In content, in prescription, the framework is and must be malleable to evolving priorities. In character, as a public idea, it is by necessity subject to the changing winds of public perception. It must be embraced for what it is: contingent, variable and open. Corporate leaders are right to want to strive toward common reporting standards to level the playing field on which they will be judged vis-à-vis their competitors, but that should not mean that corporations should give up on those goals for which a neat measurement tool has not yet been designed. Business leaders have a unique opportunity to break through the noise to assert what ESG means to their organization — a chance to define a larger purpose.

Global events can shatter the best-laid plans  

Global events such as Russia’s invasion of Ukraine, the Iran nuclear deal and the Taliban’s return to control in Afghanistan all affect global supply chains. While these events themselves are beyond the control of any one company, how corporations prepare for and respond to shifting public opinion carries both significant operational and reputational risk. 

When Russia invaded Ukraine in February 2022, stakeholders demanded that corporations respond. In a matter of months, hundreds of companies pulled out of Russia, often at a significant cost. McDonalds estimated a loss of $1.2 billion, Adidas expects a one-per-cent loss in global revenue and Canadian miner Kinross Gold was forced to sell its Russian assets at less than half their previous value. The week of Russia’s invasion, the S&P 500 plunged to a nine-month low, losing more than 500 points and erasing billions of dollars in shareholder value. For anyone paying attention to Russia’s well-known record of human rights abuses and illegal annexation of Crimea in 2014, these losses could have been mitigated. 

Some may respond to events of this nature by writing off globalization altogether, but purpose-driven companies will see this as an opportunity to clarify and strengthen their international strategies. With U.S. Secretary of the Treasury Janet Yellen advocating for “friend-shoring,” in which democracies make a conscious effort to support each other’s supply chains, we may be on the cusp of a renewed opportunity for Canadian businesses to expand their global footprints while standing firm on their principles. 

While investment or trade with any foreign market carries a mix of risks and opportunities, a purposeful, values-based engagement strategy gives all businesses a stronger, more predictable footing to avoid the shockwave that markets felt following Russia’s invasion of Ukraine this February.  

Social movements are causing customers to vote with their feet 

In the 21st century, corporations no longer have the luxury of remaining silent when salient political events or social movements demand action. When customers and employees are affected by negative events, silence reads as complicity and can contribute to consumer boycotts and make employee recruitment and retention more challenging.  

This is illustrated in a recent survey conducted by the Canadian Centre for the Purpose of the Corporation (CCPC), which found that 71 per cent of Canadian business leaders and 55 per cent of shareholders agreed that corporations should take a stance in social and political debates when involvement is demanded by key stakeholders. Those who take a stand early are deemed far more credible. 

Take the case of Hudson’s Bay. Following the election of Donald Trump, the company faced a backlash in 2017 over its department stores selling Ivanka Trump-branded merchandise. Rising stakeholder expectations meant that any affiliation with Trump’s controversial presidency created a radioactive risk for Canadian business. After a year of embarrassing criticism, the company was forced to belatedly end its affiliation. 

Likewise, Facebook in 2020 saw its ad revenue decline significantly after its failure to crack down on hate speech led major companies like Microsoft, Starbucks and Unilever and Canadian retailers Lululemon and Arc’teryx to pull their ad revenue. At the height of the crisis in June 2020, Facebook’s continued inaction saw its stock slide by 8.3 per cent, erasing $56 billion of the company’s value in a matter of weeks. 

Research conducted by Dr. Rachel Ruttan from the Rotman School of Management, in partnership with the CCPC, places even higher expectations on businesses, arguing that taking a stand alone is not enough. When faced with issues like Ivanka Trump’s brand or a boycott of Facebook, it is fundamental that corporate statements align with a company’s own actions and its authentic corporate purpose.  

Diversity, equity and inclusion (DEI) planning can mitigate turnover 

In the aftermath of George Floyd’s murder, many large companies that made statements in support of Black Lives Matter found themselves called out by activists and even their own employees for a lack of diversity in their hiring practices. Much of corporate Canada rushed to sign the BlackNorth Initiative CEO pledge, promising to hire at least five per cent of their workforce from the Black community, create diversity and inclusion plans, and close the racial economic gap.  

This enthusiasm did not lead to strong implementation, as most companies failed to demonstrate substantial progress two years after the fact. While much of corporate Canada may feel tempted to allow DEI pledges to recede as priorities in the face of volatile market conditions, they do so at their own peril, exposing themselves to potential backlash from employees and stakeholders, while missing an opportunity to differentiate themselves. 

Take the “great resignation,” for example. While many factors have contributed to the exodus of young workers, most can be broadly tied to a sense of alienation. Smart DEI initiatives fight this sensation, making people feel like they belong and can bring their whole selves to work. Those who cannot create such a culture and whose inaction reinforces a sense of otherness are likely to face continued turnover.   

Act now, or risk losing the social licence to operate 

A company’s operations depend on support from key stakeholders, including employees, customers and host communities. One of the biggest social risks any business faces is losing this social licence to operate. Without support from local communities, projects can easily become imperiled. Most Canadians will remember the Wet’suwet’en pipeline dispute, which sparked nationwide protests and shut down Canada’s critical rail infrastructure in 2020. This incident is far from unique. 

Protests from Indigenous groups and environmental activists also shut down Kinder Morgan’s pipeline in 2018, ultimately forcing the federal government to buy the Trans Mountain project for $4.5 billion. In 2015, local opposition and protests had threatened the viability of Northern Gateway.  

Each of these projects had satisfied environmental criteria (including emissions plans) and secured necessary government approvals, but, in all three cases, challenges to a company’s social licence to operate created unanticipated costs, impeded operations and imperiled the most basic business functions. 

These challenges extend far beyond the natural resources sector. The Sustainability Accounting Standards Board (SASB), the leading standards body in ESG risk assessment, identifies 26 sustainability issues, including community relations, data security, labour practices and critical incident risk management that can materially affect a company’s operations.  

Cyberattacks can cripple business operations; protracted labour disputes and strikes can imperil a company’s bottom line; and responses to mine accidents, plane crashes, systems failures and other critical incidents can significantly impact a company’s ability to recruit employees, compete for customers and maintain public confidence. Corporations who hope to lead in the 21st century must keep these social considerations front of mind to preserve their social licence and ability to operate effectively. 

Understanding social risk in Canada 

Understanding the unique challenge of quantifying climate risks, Mark Carney and the G20 Financial Stability Board created the Task Force on Climate-related Financial Disclosures (TCFD) in 2015 to help the private sector implement the goals set out in the Paris Agreement. The resulting TCFD framework has become the gold standard of climate risk analysis. Similar analysis is desperately needed for businesses to understand and mitigate the effects of social risks. That’s where we come in. 

Navigator created the Canadian Centre for the Purpose of the Corporation to provide insights and help business leaders understand their environments and build purposeful companies. The CCPC equips Canadian businesses and organizations to strengthen the scope of their purpose and respond to stakeholder needs with authenticity. 

This September, the CCPC launched the Purpose Index 2022, a groundbreaking survey of 500 Canadian business leaders and 3,000 Canadians to understand their perspectives on social purpose for businesses. The findings demonstrate that the movement towards purpose-driven businesses is growing. Canadians are deeply concerned about our nation’s environmental and social problems. They expect companies to do more to address those issues.