INTEGRATING ESG AND STAKEHOLDER TRUST INITIATIVES IN 2023:
The Definitive Guide
This is my complete guide to integrating
stakeholder trust and esg in 2023.
In this all-new guide, you will learn how to:
- Identify and map stakeholder networks
- Combine multiple ESG frameworks
- Classify Interactions and Material ESG Issues
- Conduct a Double Materiality Analysis
- Solidify your Social Contract
so, if you want to integrate your Stakeholder
Trust Initiatives and ESG, you'll love today's guide.
Let's get started.
Everyone knows that making strategic business decisions is important, but what many leaders are missing is the understanding of how to truly leverage ESG data, stakeholder insight, and risk analysis to get a fuller picture of what’s happening and how to move forward.
The key to sustainable business growth is about more than data, it’s about
trust. But, trust is something that is typically built through relationships which
means institutional and relational knowledge is kept in the brains of your
employees, on notepads, and maybe in a document. But that data is
important. In fact, when combined with ESG data, it has the potential to shift
your business development strategy and exponentially increase your growth.
Up until now, it’s been unclear how to bring it all together and aggregate the
data to get a clear picture that leads to strategic action. ESGTrust has solved
this problem but before we get to that, you need to understand how to:
- Identify and map stakeholder networks
- Combine multiple ESG frameworks
- Classify Interactions and Material ESG Issues
- Conduct a Double Materiality Analysis
- Solidify your Social Contract Across your Supply Chain
Once you understand these principles, you’re able to integrate Stakeholder
Trust Initiatives and ESG giving you a unique competitive advantage.
This guide is intended to save you hours of research time by giving you a comprehensive and succinct overview of what you need to know about ESG and Stakeholder Trust to make the next best decision for your organization.
Let’s dig in.
Contents
CHAPTER 1:
Double Down on Materiality and Internal Controls
While market demand for ESG Data is on the
rise, internal and external stakeholders often
don’t have the same level of confidence in the
reliability utility, and quality of sustainability
information as they do with financial data
A holistic approach to managing systemic issues like Climate Change, Deforestation, and Human Rights.
The purpose of this guide is to present a series of techniques that can be used
to unify multi-stakeholder interactions with Environmental, Social, and Governance (ESG) data.
They represent different frameworks that work independently of each other.
What I am proposing, however, is that if you combine them, you can find new
ways to build confidence in ESG Data and offer a more holistic approach to
the management of Systemic Issues like Climate Change, Deforestation, or
Human Rights.
For this purpose, we’ll focus on The Multistakeholder Method to illustrate how
these techniques can be combined and used to create a system of internal
controls for sustainability information.
In its most basic form, The Multistakeholder Method is a practice that employs bringing multiple stakeholders together to participate in dialogue, decision making, and implementation of responses to jointly perceived problems.
Ample research and practical case studies suggest that enterprise value is
being redefined from a single stakeholder focus, i.e., shareholder value, a
vision that has prevailed since the time of Milton Friedman, to a
Multistakeholder model of value creation proposed by Dr. Edward Freeman, in
his landmark book, “Strategic Management: A Stakeholder Approach” which
suggests that shareholders are merely one of many stakeholders in a
company.
This transformation has been more than a quarter century in the
making. Still, it has accelerated in the past five years because of the
convergence of a spike in interest in ESG from investors, more consumer
awareness about environmental and social impacts, an accelerated
momentum toward global reporting standards and significant regulation in
the US, Europe and Asia.
All these pressures are accelerating the need for companies to disclose information about their transition towards a low carbon economy. This transformation also entails an expansion of the traditional definition of Materiality.
The standard for materiality articulated by the Supreme Court — “an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”
This benefits investors in at least three ways.
- By filtering out irrelevant information, it helps ensure that investors are not buried in an “avalanche of trivial information.”
- It requires public companies to consider the information they are required to disclose based on their particular facts and circumstances.
- As changes occur in either the broader economy or within a public company, the information that is important to a reasonable investor changes and the materiality standard requires public companies to adjust their disclosures.
This approach looks at Materiality from an “outside-in” perspective.
How is this different in a Multistakeholder Model?
In a Multistakeholder model, the definition of materiality shifts because the value creation is now dependent on a multistakeholder perspective.
Thus, companies need to identify those stakeholders and document their
interactions to determine what value means to them. Then we can evaluate
how much positive impact is generated from an “Inside-out” perspective.
The combination of the two is known as Double Materiality.
In the second to last chapter, we will cover Double Materiality in more depth.
Materiality and ESG Reporting
Along the continuum of ESG reporting, there is also a bifurcation regarding
Materiality. For example, the SASB’s approach to materiality is based on the
traditional, financially oriented definition that is well-accepted globally:
information that is reasonably likely to be important to investors in making
investment decisions.
SASB has identified material issues for each industry which facilitates the
analysis and benchmarking. For example, here is a table representing the
material issues for the Extractive Industry.
SASB Materiality Analysis
for Extractive Industries
In April 2021 GRI and SASB published A Practical Guide to Sustainability
Reporting Using GRI and SASB Standards in it, they identified the difference in
their respective approach to Materiality.
The GRI reporting framework guides organizations to select topics that reflect their most significant economic, environmental, and social impacts in consultation with its stakeholders.
These topics could include issues that have financially material impacts on the
organization as well as topics that impact people and the environment outside
the organization – such as greenhouse gas emissions, human rights, supply
chain practices, and many other matters.
On the other hand, SASB’s approach to materiality is based on a traditional, financially oriented definition that is well-accepted globally: information that is reasonably likely to be important to investors in making investment decisions.
As we can see, this reiterates the point of having different audiences for ESG
information, on the one hand, investors (SASB/ISSB), and on the other, the rest of
the stakeholders.
Dynamic Materiality
One of the aspects of materiality that has gained traction lately is the concept
of dynamic materiality. Going all the way back in history, we see that this idea
of a dynamic approach has been applied to strategy for centuries. The
greatest theorist of war, Carl von Clausewitz, famously said: “Strategy
needs to be dynamic, and constantly changing and rejuvenating.” In his
famous book “On War”, he said, “some generals consider only unilateral
action, whereas war consists of a continuous interaction of opposites.”
The same idea applies to ESG Materiality. It has to be dynamic and constantly rejuvenating given the pace of change in stakeholder expectations.
Take for example, the Top 10 Global Risks for 2018 identified by the Allianz Risk Barometer.
Top 10 Global Business Risks for 2018
Note: A global pandemic was not even on the radar.
We can hopefully all agree that the world in 2022 looks very different from
2018. Yet many companies are still using materiality assessments created in
that period. The concept of “dynamic materiality” was first introduced by the
World Economic Forum (WEF) in early 2020 and is gaining traction.
Now, the five reporting standards—CDP, Climate Disclosure Standards Board.
(CDSB), the Global Reporting Initiative (GRI), the International Integrated
Reporting Council (IIRC), and the Sustainability Accounting Standards Board
(SASB)— affirm that materiality should be considered dynamic and that
sustainability topics can become financially material over time.
Moreover, according to the WEF, “the ability to anticipate stakeholder
reactions to emerging sustainability issues and how they could affect a
business and its performance is therefore critical.”
Even in the IFRS Exposure Draft for the upcoming Global Sustainability
Reporting Standards, “Materiality judgments shall be reassessed at each
reporting date to take account of changed circumstances and assumptions.”
We will explore materiality in more practical terms in chapter 7.
The Need for Internal Controls
There is another aspect of ESG reporting that has significant importance as
we move forward with trying to integrate Financial and Sustainability data:
Controls to assure the validity and quality of ESG data.
The difference in ESG and financial data, according to a groundbreaking
paper (by Hertz et all 2017) is that “financial data is bolstered by the widespread use of common accounting standards, effective internal controls, sound data governance, well-established regulatory oversight, rigorous external audits, and broad market acceptance.”
They argue that although many organizations have begun to establish
ad-hoc controls around specific sustainability-related risks, activities, and
performance indicators, relatively few have integrated key sustainability
information into a comprehensive system of internal controls.
In part, I believe, because the frameworks are still being developed.
That is why there is great anticipation for the upcoming study sponsored by
COSO that will shine some light on best practices for ESG controls.
Fig 1: The COSO Cube
This divide between FInancial and ESG data propagates through the
departments that own the data inside organizations.
The need to align the office of the CFO, the Chief Sustainability Officer, Enterprise Risk Management, Investor Relations, and External Affairs when it comes to collaborating on ESG data is huge.
In analyzing the difference between risk disclosures and ESG disclosures;
COSO and The World Business Council for Sustainable Development identified a few key points:
- Lack of knowledge of ESG-related risks across the entity and limited cross-functional collaboration between risk management and sustainability practitioners.
- ESG-related risks are managed and disclosed by a team of sustainability specialists and viewed as separate or less significant than conventional strategic, operational, or financial risks – leading to a range of biases against ESG-related risks.
The following diagram provides a representation of all the different
departments that will ultimately produce or consume ESG data and for which
alignment and collaboration will be key.
Sample Governance Structure
CHAPTER 2:
Stakeholder Mapping
Stakeholder Mapping is the visual process of
laying out all the stakeholders of a product,
project, or idea on one map. The main benefit of
a stakeholder map is to get a visual
representation of all the people who
can influence your project and how they are
interconnected.
The Complexities of Stakeholder Dynamics
The first step in being able to understand stakeholder expectations is to
organize stakeholders into groups and then map them using various
techniques to understand their interests, influence, power, and other
parameters that can be used to set up a cohesive strategy for engagement.
The challenge is that stakeholder data is qualitative, subjective, mostly unstructured, and scattered in a myriad of places.
When we can’t measure, we must map.
So, how do you measure something qualitative with a high degree of
subjectivity and fragmentation?
In a relevant paper on the matter, famous physicist Fritjof Capra answers the
question when he says, “Qualities arise from processes and patterns of
relationships among the parts. Hence, we cannot understand the nature of
complex systems such as organisms, ecosystems, societies, and economies if
we try to describe them in purely quantitative terms.”
“Quantities can be measured; qualities need to be mapped.”
Capra argues that “The major problems of our time are systemic problems, which means that they are all interconnected and interdependent.”
Large projects may have hundreds or even thousands of stakeholders.
Projects have limited time and resources.
Therefore, the amount of effort spent on stakeholder management and
engagement must be prioritized.
… but how?
What criteria do we use to classify stakeholders?
How do managers determine which stakeholders have the most significant
impact or influence and deserve the most attention?
How do project managers prioritize their attention to competing stakeholders?
These are precisely the problems that the stakeholder classification models
address. Therefore, It is essential to prioritize the stakeholders to ensure
efficient use of effort to communicate and manage their expectations.
There are several ways to classify stakeholders using maps. Some of the most
commonly used are Power/Interest Grid, Power/Influence Grid,
Influence/Impact Grid, and The Salience Model.
For this analysis, we will focus on The Salience Model.
Mitchell, Agle, and Wood (1997) hold that stakeholder analysis should be
oriented by the concept of salience. Salience is a tri-dimensional
construct based upon the stakeholder’s power, legitimacy in making
requests to the enterprise, and the urgency of its stakes.
Only those stakeholders that have the power to influence the enterprise’s
activities that are legitimated by society and that stand up for urgent issues
are the relevant ones, their requests are those that managers need to answer
through the enterprise’s activities fully. If only two of the attributes are present,
the stakeholders’ expectations will be considered, but managers will not be
strongly pressured to answer them. If the stakeholder has only one attribute, it
should not be considered a relevant one.
Fig 2. The Salience Model
- Power: the ability project stakeholders have to influence the outcome of an organization, deliverable, or project – essentially the ability of a stakeholder to impose their will.
- Legitimacy: the authority and level of involvement project stakeholders have on a project and whether their involvement is appropriate, and to what level.
- Urgency: the time expected by project stakeholders for responses to their expectations and the need for immediate action.
Categorizing your stakeholders with this three-dimensional view allows you to
narrow down the critical stakeholders and decide how to act in certain
situations and provides a typology that can be used to further prioritize
resources based on where the stakeholder is regarding the three parameters mentioned above.
There are numerous ways to map stakeholders; the vital thing is to start mapping those relationships and identifying key issues as early as possible.
A good map can provide the strategic framework to act and measure
the results of our actions. To create any stakeholder map, it is essential first to
establish a system of record that allows for the parametrization of the
relationship as well as the ability to track interactions and stakeholder inputs.
The actual process of mapping is very simple whether it is the Salient model or
any of the other models, it is just a matter of selecting the parameters.
The difficult part is having the right information to arrive at the right parameter.
This can only be achieved by proactive engagement so that you can gather the right intelligence.
(In short, your relationships with stakeholders matter.)
The power of this approach becomes evident when we view this information
at scale. The power of correlating the Map with the level of interactions enables
us to answer questions like: Are we spending our engagement resources on
those stakeholders that are the most salient?
And those answers are what can change your strategic direction, save you millions, and allow you to create the impact you’re after.
Visualization of Stakeholder Interactions Over Time
CHAPTER 3:
Stakeholder-Issue Networks
Mapping stakeholders and issues in a single
view presents some challenges that the Salience
Model or any of the other mapping techniques are unable to resolve.
You can do a single map per issue, but then you
lose the correlation aspect which is critically important.
In summary, none of these maps take into account the material ESG issues and map stakeholders accordingly in a holistic manner.
Completing the Puzzle: Stakeholder-Issue Analysis
There are other examples of stakeholder maps that are segmented by issue,
but even those have clear limitations. To shine some light on this problem,
I turn to the seminal work on Social Network Analysis and Non-Market Strategy (Mahon et al 2003).
Non-market strategy is a broad term that refers to a firm’s activities outside of the marketplace that can help it gain a competitive advantage (Baron 2009).
They also clarify that typically, companies don’t have a division called
“non-market strategy.” Instead, firms have divisions that carry these
non-market functions, but these groups are often referred to as Corporate
Social Responsibility or Sustainability.
They argue that “To date, the field of non-market strategy has little to offer in
the way of an integrated perspective on the simultaneous management of
strategic issues and corporate stakeholders. This paper employs social
network analysis to make a number of theoretically grounded conjectures
about the delicate relationships between stakeholder behavior and issue
evolution. It is found that social network analysis has the potential to enrich
and integrate theoretical perspectives in the field of non-market strategy,
offering solutions to a set of previously unresolved puzzles.”
They made the critical observation that non-market strategy is bifurcated into
two camps. On the one hand, a large body of literature tells managers how
they should manage issues — events, trends, or developments that could
have a negative impact on the organization’s ability to reach its objectives if left unattended.
On the other hand, a parallel body of literature exists that tells managers how
they ought to deal with stakeholders. Strangely enough, very few
contributions to date shed light on how managers should deal with issues
and stakeholders simultaneously — even though it is widely accepted that
stakeholder behavior and issue evolution are delicately intertwined. (Bigelow et al. 1991, 1993).
Fig 3: Conceptual Scheme and Hypothetical Data
The authors suspect that this omission is largely due to the methodological difficulty of modeling issues and stakeholders concurrently. (Yes, this is why ESGTrust is so unique, but we’ll get to that in a bit.)
They propose social network analysis as a tool that can span the somewhat
artificial chasm separating issues and stakeholder management.
In the following image, we can see a depiction of the relationship between
stakeholders and issues using social network analysis.
Visualizing the Stakeholder-Issue Interrelationship
The network analysis provides several insights, but at the same time, the
amount of information can be overwhelming. That is why we employ filters to
simplify the analysis. So that you can view by relationships, groups, ESG issues, etc.
Using Filters to Simplify the Analysis
Integration with Risk Management
Material ESG issues are key to understanding the range of ESG risks facing
companies. These issues can be evaluated thematically to understand ESG
risk for a sub industry or across all industries. Each issue can have value as a
standalone assessment to determine which risks are unmanageable, the
trends for an issue, and the degree to which a topic is susceptible to
controversies. Combined together, the material ESG issues can serve as a
powerful signal for a company’s overall unmanaged ESG risk.
According to the World Business Council for Sustainable Development
(WBCSD) despite an increase in ESG disclosures, evidence shows that the
issues reported in sustainability reports or ESG disclosures do not always align
with the risks reported in an organization’s risk disclosures.
WBCSD member companies point to a range of reasons for this, including:
- The challenge of quantifying ESG-related risks in monetary terms. Not doing so makes prioritization and appropriate allocation of resources much more difficult, particularly when the risk is long-term with uncertain impacts emerging over an unknown time period.
- Lack of knowledge of ESG-related risks across the entity and limited cross-functional collaboration between risk management and sustainability practitioners.
- ESG-related risks are managed and disclosed by a team of sustainability specialists and viewed as separate or less significant than conventional strategic, operational, or financial risks – leading to a range of biases against ESG-related risks.
Of particular notice is the recognition that there is a limited cross-functional
collaboration between sustainability and risk. A similar situation has been
identified between the CFOs and the Chief Sustainability Officer.
One way to bridge this divide is by establishing the type of controls integrating
the three elements we have discussed – namely Stakeholders-Issues and ESG Risks and Opportunities.
By linking risks with ESG issues and their stakeholders, we can better
understand the root cause and design better controls to proactively address
the stakeholder risks before they become catastrophic.
The screenshot below shows how you can create a risk object that
incorporates ESG issues, stakeholders, locations, and a risk interaction map to
understand the relationship between different types of risks.
Creation of Risk Analysis Using Material Issues as the Classifier
Let’s take a look at how this could be done using ESGTrust.
There are a number of parameters that can be incorporated when creating the risk profile.
Including locations that will require specific local-based controls to address
the risks. In the following Heat Map, we can see the Risks and Opportunities,
where the size of the circle represents the number of stakeholders affected by that risk.
If we drill down, we can see the network of risks that are associated with the
risk that we are analyzing.
If we drill down on the risks, we can see the network of stakeholders where the
circle’s color represents the type of stakeholder group they belong to.
For example, in the image below, 350.org is a non-profit organization
represented by the turquoise color, just like Greenpeace, which is also a non-profit.
Visualizing the Stakeholder-Issue Interrelationship
When we drill down to an issue, we can see the network of risks that are associated with that issue.
By using network analysis to depict the interrelationships between
stakeholders and issues, we open a range of possibilities for mapping and
correlating the qualitative data associated with this type of analysis.
CHAPTER 4:
Building Stakeholder Trust
Building Stakeholder Trust
When done effectively, taking a multi-stakeholder
approach to building trust can create a positive
feedback loop that can be a true force multiplier.
The challenge is that managing stakeholder trust is
a complex process because stakeholder groups
have different needs, and efforts aimed at solving
one trust problem can exacerbate others.
That is, trust is multidimensional, and it is not obvious which dimension executives need to focus on when dealing with any particular constituency.
The Power of Trust
So far, I have introduced three main points about the Multi-stakeholder model:
- Qualitative data cannot be measured; it needs to be mapped.
- Stakeholder mapping is a commonly used technique to visualize your stakeholders and understand how they are interconnected and who counts.
- Social Network Analysis is a good technique to visualize the interdependence between stakeholders and issues.
These techniques are a good starting point, but to get more valuable insights,
we need to expand our analysis to focus on Trust. The Complexity of Trust: PwC’s Trust in US Business Survey revealed that:
“Trust is multi-dimensional, not linear; it doesn’t simply grow over time; it evolves through many facets. As stakeholder priorities grow and change, this complex nature of trust puts pressure on business leaders to consider and prioritize the needs of many and constantly shift how they meet and manage stakeholder expectations. In fact, 43% of business leaders cite varying stakeholder expectations as the top challenge in building company trust.”
Trust has been widely recognized as a key enabler of organizational
success [1]. Trust has been shown to facilitate efficient business transactions
[2-4], increase customer satisfaction [5-7], and enhance employee
motivation and commitment [8,9]. More generally, trust promotes
cooperative behavior within organizations [10-12] and between organizational
stakeholder groups [13-14], as it fosters commitment [7,16], motivation [15],
creativity, innovation, and knowledge transfer [17-21].
As such, by strengthening relationships between the firm and its various
stakeholders (e.g., employees, customers, investors, etc.), trust can serve as a
source of competitive advantage for the organization [15, 22, 23].
For these reasons, scholars have argued that trust and trustworthiness are a more efficient mode in the establishment of cooperative interactions that lead to value creation [24]..
For one of the most interesting and influential studies on Trust, we can go back
half a century to the seminal paper by Nobel Laurette in Economics Keneth
Arrow. Known as the article that launched a thousand studies, and the
creation of the health care economics field. He was the first to identify that
“virtually all the special features of the healthcare industry, in fact, stem from
the prevailance of trust. Because trust arises from vulnerability, and
uncertainty is one major form of vulnerability.” He goes on to make the
compelling case that “the unique features of the medical marketplace,
therefore, can be understood as enhancing or justyfying the high level of trust
that is needed in order to cope with the intense axiety that results from the
uncertainty in the face of illness.”
Kenneth Arrow was arguably one of the most influential economist of the 20th
century. He understood at a deep level the relationship between risk,
uncertainty and trust. The integration of these elements provides a solid base
for the start of our Trust Analysis.
The body of work above is a clear evidentiary indication of the value of Trust. But, how can we build trust in a Multistakeholder environment?
In their innovative approach to managing stakeholder trust, Michael Pirson
and Deepak Malhotra developed a framework that differentiated across
stakeholder groups along two dimensions. The first measures the intensity of a
relationship based on the length and frequency of interactions
(intensity; X-axis). The second relates to whether a stakeholder is inside or
outside the organization (Locus; Y-axis). These two dimensions—Depth and
Locus—create four archetypes of stakeholder groups: internal/deep,
internal/shallow, external/deep, and external/shallow. Figure 4. provides a
graphical representation of these archetypes and also categorizes four
specific stakeholder groups—employees, customers, investors, and suppliers—
according to the relationship these stakeholders typically have with organizations.
The authors note that ”the four quadrants should be viewed more as a
general map” rather than as a table of four clearly demarcated cells.
Fig 4. Depth and Locus Diagram
The study on stakeholder trust conducted by the authors investigated trust
across four types of stakeholder groups at four differently structured
organizations across Western Europe: Including a small to medium
manufacturer, a large logistical company, a global consulting firm, and a
public university. Nearly 1,300 stakeholders participated in the study. People
who recorded more than 100 interactions and more than a three-year
relationship with the organization were classified as having a high-intensity relationship.
The findings of the study were that “different stakeholder groups do not place
the same importance on the different factors of trust studied: integrity,
managerial competence, technical competence, benevolence, transparency,
and identification (or value congruence).”
For example, people in shallow relationships with the company do not place
their trust in benevolence, whereas people in deep relationships do.
Fig 5. What Matters to Whom?
The goal of this analysis is not to go into excruciating detail about every
framework that’s been presented but rather to propose ways in which these
frameworks can be integrated into a unified model using software so that we
can move from the theoretical to the actual. For example, the following
screenshot depicts an adaptation of the model by enhancing the quadrant
analysis when we focus on a specific issue.
The theoretical model only provides the archetypes but does not provide
any details about which issues the stakeholders are most concerned about.
In our case, because we already illustrated how social network analysis can
help map stakeholders and issues concurrently. We can provide an additional
dimension to the original model by breaking the information by Material Issue.
In the following image, we can see how we have a series of Material Issues on
the left encircled in orange and the quadrant on the right.
Visualization of Quadrants
Because our goal is to integrate these techniques to enhance the utility of the
data, we combined the quadrant and issue analysis to differentiate
the information further and get more granular outcomes.
When any of those issues get dragged to the quadrant; the analysis presents
the intensity and the location of the stakeholders for that particular issue.
For example, when I drag the issue of Climate & Air Quality to the quadrant analysis…
Measure Trust by ESG Material Issue
I immediately see all of the different stakeholder groups associated with that
issue and organized into the four quadrants, using the color and size of the
circle to depict the type of group and the number of actual stakeholders
identified for that group.
The boxes on the lower left-hand corner represent the different attributes
identified by the authors as the main drivers for trust.
When we click on a particular quadrant, for example, high dept internal on the
lower right-hand corner of the quadrant, we can see that Managerial
Competence and Value Congruence and Identification are the two main
attributes to measure according to the model.
Predictive Model
One of the main conclusions of the study was that both of the dimensions that
were studied—intensity and locus—had significant predictive power.
Trust is based on the perception of different attributes to different stakeholders.
Stakeholders who had low-intensity relationships with the organization
(e.g., suppliers and investors) based their trust in the organization largely on
perceptions of integrity. Trust among high-intensity stakeholders
(e.g., employees and customers), in contrast, was based on perceptions of
integrity, benevolence, and reliability. Thus, perceptions of integrity were relevant to trust attributions for all stakeholders.
The key distinction between high and low-intensity stakeholders was the role
of perceived benevolence and reliability. While some research
(e.g., Dirks et al., 2001) has combined benevolence and integrity
(as “character”), their research results suggest that these are meaningfully
distinct (cf., Mayer et al., 1995), at least in the context of organizational trust.
The conclusion of the study was that their framework challenges some existing beliefs and sheds light on a number of areas that companies would be wise not to ignore.
In particular, their results suggest that:
- Managers need to better understand the seemingly expansive role of value congruence and identification.
- More fully consider the contexts in which integrity without benevolence is a recipe for distrust.
- More carefully investigate the distinction between managerial and technical competence.
- More rigorously evaluate the cost and benefits of transparency initiatives
Net Truster Score (NTS)
To provide additional utility to the model so that we can drill down on each
circle and understand at a granular level the trust score for each stakeholder,
I propose to combine it with a variation of a very popular marketing technique
called Net Promoter Score (NPS).
NPS is a widely used market research metric that typically takes the form of a single survey question asking respondents to rate the likelihood that they would recommend a company, product, or service to a friend or colleague.
Its popularity and broad use have been attributed to its simplicity and
transparent methodology of use.
Since our goal is to get a better understanding of stakeholder trust, I propose
to modify the question so that we don’t try to measure who is a promoter but
rather which stakeholders trust the organization.
In 2019, The Edelman Group – the largest public relations company in the
world- proposed a variation to the NPS with the following question.
To what extent do you trust the organization to do what is right?
Interestingly, they observed “fascinating parallels between the level of trust a
company enjoys and its long-term performance in the marketplace and on the stock market.”
If we combine both frameworks, we can start building confidence in our data
by correlating the two. What this means is that if we drill down to any of the
circles on the quadrant, we can get that next level of granularity where we
can compare the trust score versus the intensity of interactions for each stakeholder group.
Integration of NTS and Interactions
How do we unify Stakeholder Mapping and the Quadrant Analysis?
Professor Bret Crane provides an interesting analysis that gives us a way to
bridge the gap between creating stakeholder maps and managing trust.
He argues that “with limited resources and attention, managers have sought
ways to categorize and prioritize stakeholders. The underlying assumption is
that some stakeholders matter more than others. However, in the information
age, stakeholders are increasingly interconnected, where a firm’s actions
toward one stakeholder are visible to others and can impact members of the stakeholder ecosystem.
Actions by a firm toward any of its stakeholders can signal its trustworthiness
and determine to what degree other stakeholders will assume vulnerability
and engage in future exchange relationships. He presents a model of
stakeholder connectedness that describes how a firm’s actions toward one
stakeholder can build or erode trust across stakeholders.
He outlines six propositions:
- Actions by a firm toward one stakeholder provide cues to other stakeholders that will influence the perceived trustworthiness of the focal firm.
- Voluntary actions toward one stakeholder are associated with the increased trust of other stakeholders that observe the firm’s actions.
- Actions that convey organizational transparency toward one stakeholder are associated with the increased trust of other stakeholders that observe the firm’s actions.
- Actions that convey organizational responsiveness toward one stakeholder are associated with the increased trust of other stakeholders that observe the firm’s actions.
- Stakeholder proximity will increase the effects of stakeholder connectedness through trust such that a firm’s actions toward one stakeholder to build trust will increase the trust of other stakeholders that are most proximate to the focal stakeholder.
- The prioritization of stakeholders decreases stakeholder trust in the focal firm.
On the other side of the spectrum, we have those who say that we cannot
measure trust by asking a single question that includes the word trust because
of the inherent bias in the question.
Instead, they propose that we can get a more predictive model by focusing the questions on the qualities of trust.
One example of this approach can be found in the upcoming book The Four
Factors of Trust (Reichheld & Dunlop 2022)
Their research states “that trusted companies outperform their peers by up to 400%, that customers who trust a brand are 88% more likely to buy again, and that 79% of employees who trust their employer are more motivated to work (and less likely to leave. The importance of trust is at an all-time high – just as our inclination to trust is at an all-time low. Trust ultimately comes down to just Four Factors: Humanity, Capability, Transparency, and Reliability.”
Each of the models presented above has one thing in common; they provide a
path toward measuring trust and are all based on evidence collected through
empirical research.
So, no matter which model you choose, you will find value in getting a more
granular understanding of how trust cuts across all your stakeholders and the
issues they care about the most.
Now that we have connected the mapping of stakeholders with the
measurement of trust, let us turn our attention to how we can capture
stakeholder communications and interactions to get a more granular and
dynamic materiality assessment.
CHAPTER 5:
Capturing Stakeholder Interactions
At the core of the engagement process is the
interaction with the stakeholder. In the past, it
was expensive and time-consuming to bring all
stakeholders to the table for a consultation.
With the advent of technology, things have
changed, and almost any type of stakeholder
can be reached via video conferencing.
How to Document Interactions
The challenge is that we need to collect several layers of information.
For example, it’s not the same effort to manage a complaint or make a social
investment as having a series of meetings that ultimately lead to nothing.
In the case of the series of meetings, the number of interactions is bigger but the impact is not.
To address this problem, we use the ability to assign different weights to the
interactions so that social investment has more relevance than a meeting.
Differentiating values for interactions provides a lot of flexibility because we
can use historical and impact data to calibrate the model so that the weights
better reflect the reality of the importance of one interaction vs another. We
can then apply a predictive AI platform like Einstein Intelligence and use
machine learning to get a more accurate measurement of the relative weights
of the interactions as the model evolves. In addition, we need to collect
information on the project and the location or the Material Issues related to each interaction.
The goal then becomes to add as much data in the smallest number of steps.
The following example shows how we can collect several pieces of data
through a series of steps represented by the boxes on the left that say
Projects, Focus Areas, and Details. At the same time, while we are in the project
step, we also have several steps within that step which can be seen in the box
on the right below, where we can see how we can add stakeholders, locations,
and other types of information.
This streamlined approach allows us to collect data at each step with ease.
Once the initial parameters are chosen, there is an additional step to select
the ESG issue that the interaction is related to. This is a critical step that will
allow us to quantify the intensity of the interactions at a later stage.
The data architecture of each type of interaction varies depending on the
nature of the interaction. Some interactions require workflows, i.e., Grievances.
Others require budgets to track investments. In all, they share common
elements like projects, stakeholders, and KPIs.
One of the main challenges with capturing qualitative data is that you can’t just stack it up and count it with the same level of certainty that you can count the number of molecules of CO2 emitted at a specific location.
As mentioned earlier, we can map and correlate qualitative data to derive
insights. For example, when a company makes a social investment to help the
communities where they operate, they don’t just do it in a vacuum. There is a
process that started way before. At first, the company had to identify the
stakeholders, engage and understand the impacts, measure the risks of doing
nothing and then decide to invest.
Given the complex nature of the process, any attempt at managing it requires
a multistakeholder approach. In each step, there is valuable data that can
later provide context for creating institutional memory about key decisions.
This knowledge can help the company replicate successful investments and avoid mistakes leading to stakeholder backlash. Generating corporate memory about the relationships with stakeholders is a critical element of a resilient strategy.
Social Investment Heat Map
CHAPTER 6:
ESG Frameworks & Taxonomies
A landmark announcement by the IFRS
Foundation at COP 26 has paved the way for a
new era for ESG reporting. In its remarks at the
plenary, IFRS Trustee Chair Erkki Liikanen said,
“Capital markets have an essential role in
reaching net zero. But that can only happen
when sustainability information is produced with
the same rigor, assurance of quality, and global
comparability as financial information.”
The Evolution of ESG Frameworks
The creation of the International Sustainability Standards Board (ISSB) is a
game-changer at many levels.
The Value Reporting Foundation (VRF), formed through a recent merger of the
Sustainability Accounting Standards Board (SASB) and the International
Integrated Reporting Council (IIRC), and elements of the Climate Disclosure
Standards Board (CDSB) will be consolidated into the IFRS Foundation.
The Global Reporting Initiative (GRI) will still exist as a stand-alone standard setter.
It should be noted that the intended audience for GRI Standards includes not
only investors but other stakeholders, too. As such, there is a complementary
nature to the GRI Standards and the expected standards from the ISSB.
It is, therefore, expected that since companies sometimes want to
communicate to multiple audiences, there might be a desire to continue to
report using multiple frameworks. GRI and IFRS announced last March that
they had reached a memorandum of understanding that “commits the two
organizations to seek to coordinate work programs and standard-setting activities.”
Moreover, in a recent update, they explained some of the joint activities that
have taken place, including the development of a methodology to
“cross-reference between guidance and other materials produced by GRI and
ISSB respectively to maximize the usefulness to preparers of information.”
The IFRS Sustainability Exposure Draft, published in March 2022, includes
proposals for entities to disclose information that enables primary users to
assess enterprise value. The information required would represent core
aspects of how an entity operates and builds upon the well-established work of the TCFD.
- (a) governance—the governance processes, controls, and procedures the entity uses to monitor and manage sustainability-related risks and opportunities;
- (b) strategy—the approach for addressing sustainability-related risks and opportunities that could affect the entity’s business model and strategy over the short, medium, and long term;
- (c) risk management—the processes the entity used to identify, assess and manage sustainability-related risks; and
- (d) metrics and targets—information used to assess, manage and monitor the entity’s performance in relation to sustainability-related risks and opportunities over time.
For the foreseeable future, however, it seems that companies will need to
combine and cross-reference indicators combining GRI, ISSB (SASB), and
metrics developed by the entity itself. To solve this challenge, we can use a
framework capable of developing any kind of taxonomy.
In the following example, we demonstrate how we can combine indicators
from existing reporting frameworks (including the upcoming ISSB) to arrive at a
a bespoke taxonomy. For instance, we can select the SASB, GRI and TCFD taxonomies below.
Then we can generate any Indicator by establishing the question or the
workflow that is needed to report the metric.
Below, we can see how we can add indicators to the SASB taxonomy.
Then we can generate any type of question, or the set of the workflow that’s
necessary to report the metric.
Finally, we can go through a series of steps where we select different indicators
from different frameworks to create the bespoke taxonomy. In this case from
The GRI, SASB, and TCFD.
The end result is a bespoke taxonomy that combines KPIs from different frameworks.
ISSB: The Convergence of Sustainability Frameworks
Ultimately it is the role of the ISSB to bring coherence to all the various frameworks. That process has already started to happen and will only be accelerated in the coming years.
The ISSB is expected to deliver its global baseline of sustainability disclosures
by the end of 2022. The global baseline builds upon, incorporates and protects
the heritage of the existing investor-focused sustainability disclosure
standards, including TCFD, CDSB, SASB Standards, Integrated Reporting and
the World Economic Forum’s metrics.
In a recent publication PWC informed how after years of increasingly vocal
demand for enhanced transparency about ESG matters from investors and
other stakeholders, regulators and standard setters in various jurisdictions
issued definitive proposals to transform ESG reporting in 2022. So far this year,
proposed ESG disclosures have been released in the European Union (EU) as
part of the Corporate Sustainability Reporting Directive (CSRD), internationally
by the International Sustainability Standards Board (ISSB), and in the US by the SEC.
They go on to describe how these “big three” proposals will change the way
reporting is done worldwide.
The 'Big Three' Proposals that Will Shape the Future of Reporting
This convergence raises a number of questions that go well beyond the scope
of this guide. That said, one of the foundational points of alignment among the
three proposals is the incorporation of elements based on the Task Force on
Climate-related Financial Disclosures (TCFD) framework. PWC argues that by
“leveraging this popular framework there will be a point of continuity with
voluntary reporting and unites the three proposals through key themes,
including required disclosure of the broad impacts of sustainability-related
risks as well as governance and oversight of the related risks and opportunities.”
ESG & Stakeholder Risk
According to COSO and The World Business Council for Sustainable
Development (WBCSD) “ESG-related risks are the environmental, social and
governance-related risks and/or opportunities that may impact an entity.
There is no universal or agreed-upon definition of ESG-related risks, which
may also be called sustainability, non-financial or extra-financial risks.”
The World Economic Forum (WEF) comes out every year with The WEF Risk
Report.
Their research shows that over the last decade, they have observed
an increasing interconnectedness among ESG risks themselves, as well as
with risks in other categories – particularly the complex relationship between
environmental risks or water crises and social issues such as involuntary
migration.
Figure 6 outlines the growing pace with which other organizations
have failed to manage ESG issues, leading to impacts on reputation,
customer loyalty, and financial performance. In many cases, the media,
social media, and other non-governmental organization campaigns
play a role in bringing these issues to the attention of civil society and the organization.
The scope of ESG-related risks depends on the organization, which may apply
a narrow definition, focusing on a selection of pertinent environmental or
social risks or a broad application that considers a myriad of issues such as
the MSCI ESG Issues and Themes.
If we focus on the 37 ESG key issues on the right part of the table we can easily see how each one of these key issues must have multiple stakeholders associated with them. In other words, stakeholders are only mobilized around issues, and issues only emerge when stakeholders advocate them (Bigelow et al. 1991, 1993).
ESG & Stakeholder Opportunities
On the path to Net Zero Emissions, we can see how in some cases industry is
taking a lead ahead of markets and regulations. One such example, is the
recent announcement by Salesforce of the First of its Kind Carbon Credit
Marketplace designed to empower any organization to take climate action on
their journey to Net Zero.
Source: Salesforce Net Zero Platform
CHAPTER 7:
Double Materiality
A Dynamic Materiality approach offers an
opportunity to combine all the different aspects
of our analysis. We can do this analysis at a
holistic level or drill down to any one facility
within the Value Chain.
Understanding Double Materiality
The concept of ‘double-materiality’ was first proposed by the European
Commission, in their Guidelines on Non-Financial Reporting: It encourages a company to judge materiality from two perspectives:
1) The extent necessary for an understanding of the company’s development, performance and position.
2) The environmental and social impacts of the company’s activities on a broad range of stakeholders.
The concept also implies the need to assess the interconnectivity of the two.
The Global Reporting Initiative recently published a perspective to clarify all
the confusion on Double Materiality and simplify matters. First, they describe
Materiality as a ‘filter in’ the information that is or should be relevant to users.
Particular information is considered ‘material’ – or relevant – if it could
influence the decision-making of stakeholders in respect of the reporting
company. They describe Double Materiality as the need for companies to
report on issues that influence enterprise value (financial materiality) and
matters that affect the economy, environment, and people (impact materiality).
So how can we tackle double materiality in our example?
By mapping all stakeholder interactions to the Material ESG Issues, we
establish a relationship that we can monitor over time.
Once we have made the connection, it is possible to measure the intensity of
interactions and use that metric to conduct a benchmark analysis of how
stakeholders’ interest in a specific Material ESG Issue changes over time.
By being able to take snapshots at any given moment in time, we are able to
compare how stakeholder interactions have shifted in relationship to the
different ESG Material Issues.
Stakeholder Interactions Over Time
As we can see from the image above, two types of interactions
have dominated the analysis. In this example, Red-Violet represents
complaints, and Blue-Grey represents commitments. We can see from the analysis that commitments also increased as complaints increased.
Why Matters?
By being able to track interactions in this way, we can get a better
understanding of what kind of interactions are driving the engagement and
also, if those interactions have monetary costs associated with them, such as
commitments or social investment, e.g., if a company commits to building a
health clinic in an underserved area, that commitment has a monetary value;
in this case, the cost of building the clinic. That social investment can be
tracked as well. The point is that getting more granularity in the data enables a
better decision making process.
Take, for example, the image below. The two pictures compare two images
taken from the same part of the Sky by two different Telescopes. On the left,
the image was taken by the Hubble Space Telescope. On the right, The image
was taken by the new Webb Space Telescope, which can interpret
images in the infrared spectrum and thus offers a lot more clarity, as seen in
the image on the right. Getting more details and a better understanding
of the correlation gives us a better picture of what is going on. For example, on
the left, we can hardly differentiate between the circles. On the other hand, we
can distinguish the forms much better. We can easily realize that there are
different stars at different distances and sizes on the right while on the left
everything is fuzzy. Applying this logic to multistakeholder data, we can argue
that the more organized and granular de data, the better our ability to
understand the changing expectations of stakeholders.
Bonus Chapter
Social License:
Connecting the Dots...
Over the past few months, there has been a lot
of commentary about ESG. Some talk about
peak ESG, others about ESG 2.0.
Some influential VCs like Chamath Palihapitiya,
claim that ESG investing is ‘a complete fraud’,
and Tech Tycoons like Elon Musk, think that ‘ESG is a scam.’
Influential voices in the field participated in a
week-long Virtual Dialogue hosted by r3.0.
Stating that “The problem arises when ESG strays
from its lane” by presenting itself as if it can
impact sustainability, or “make the world better.”
It most certainly can *not* — it was never
designed to do any such thing.”
Even The Economist magazine suggests that ESG is just a fad and that the
acronym will eventually disappear and that the focus should be only on
measuring Carbon Emissions and tackling Climate Change.
BlackRock, an investment firm with 10 Trillion in Assets, was forced to respond
to ‘inaccurate’ ESG attacks by a group of Attorneys General with a poignant
letter stating that “One of BlackRock’s most critical tasks as a fiduciary investor
for our clients is to identify short and long-term trends in the global economy
that may affect our clients’ investments.” pointing out that “governments
representing the vast majority of global GDP have committed to move to net
zero, and that companies and investors positioned appropriately on climate
risk and energy transition themes will generate superior long-term financial returns.”
Social License
In a recent article by Mckinsey; Does ESG really matter and why?
they elegantly refute all of the criticism by summarizing it into four categories:
- ESG is not desirable because it is a distraction.
- ESG is not feasible because it is intrinsically too difficult.
- ESG is not measurable, at least not to any practicable degree.
- Even if ESG can be measured, there is no meaningful relationship with financial performance.
According to the article, “the fundamental issue that underlies each of the
four ESG critiques is a failure to take adequate account of the social license
—that is, the perception by stakeholders that a business or industry is acting
in a way that is fair, appropriate, and deserving of trust.”
I wholeheartedly agree!
Ultimately, it comes down to a relatively simple concept: If companies fail to account for externalities, they can expect an erosion of their social license to operate.
As the article concludes, “a precondition for sustaining long-term value is to
manage and address massive, paradigm-shifting externalities. Companies
can conduct their operations in a seemingly rational way, and aspire to deliver
returns quarter to quarter and determine their strategy over the span of five or
more years. But if they assume that the base case does not include
externalities or the erosion of social license by failing to take externalities into
account, their forecasts—and indeed, their core strategies—may not be achievable at all.”
The theory of Managing Stakeholder Trust is really in its infancy according to
many schollars. So is the case with the concept of the Social License to
Operate. Some of the most advanced and practical examples of the
quantification of the social license comes from the work by Robert Boutilier
and Ian Thomson The Social License: The Story of the San Cristobal Mine.
They cite that the term was coined by two different people almost at the same
time.
On one hand, Moore (1996) who argued that paper companies should
exceed government environmental regulations in order to keep the social
license with the public. And in 1997 Jim Cooney, the Director, International and
Public Affairs at Placer Dome who used the term as an analogus of a legal
license, but focusing on the community well-being.
According to the authors the phrase ‘social license’ applies to ‘The level of
tolerance, acceptance, or approval of an organizations activities by the
stakeholders with the gratest concern about the activity.” They conclude that
“The social license is ‘intangible’. However, this does not mean it is
unquantifiable.” They make a clear distinction that “A social license granted by
a stakeholder network is not the same as a social license granted by the general public.”
Measuring the Social Licence will be the subject of another guide. That said, we
have shown how we can measure a Stakeholder Trust Score. That score is
intimately related to the granting of the social license by the stakeholder.
Especially if we consider that “one of the best predictors of influence is the
stakeholder’s position in the network of relationships among stakeholders themselves.”
In the end, Boutillier put the focus on “the quality of the relationship rather than
the concrete environmental and social impacts.”
It seems that their novel approach yielded very interesting results. A lot has
changed in the quarter century since the term was coined. Today, Mckinsey
summarize it like this “Even before the Ukraine war induced dramatic company
action, the pandemic had prompted companies to reconsider and change
core business operations. Many have embarked on a similar path with respect
to climate change. This pressure, visceral and tangible, is an expression of
social license—and it has been made more pressing as rising externalities
have become more urgent.”
A multi-stakeholder approach to building trust can create a positive
feedback loop that can be a true force multiplier. By systematically mapping
stakeholders and their issues, and by creating a feedback loop, companies
can proactively try to address externalities as a matter of strategy.
One of the advantages of this approach is that it can help align the different
departments in an organization, from the office of the CEO to the CFO, the
Chief Sustainability Officer, The Chief Risk Officer, and other areas involved with
the Value Chain.
For a company to build resiliency when it comes to the Social License, it needs to adapt to the rapidly changing stakeholder expectations.
By correlating ESG, with Trust and Risk Metrics, we can reduce workflows to
focus on a Multi Stakeholder strategy.
The concept of the Social License is not new. President Lincoln famously said
“Public sentiment is everything. With public sentiment, nothing can fail. Without it, nothing can succeed.”
What is new is that we now have the tools to measure it.
What Leaders Need to Do
To build trust, leaders need to communicate the “why” behind big decisions.
They need to admit mistakes honestly and quickly, and they need to have
ethical business practices. Clarkson (1999) identifies some main principles to
make managers more aware of their responsibility towards the other
stakeholders and the need to involve them in decision-making processes to
help cooperation, stimulate a profitable dialogue with them, and elicit a
stronger bond characterized by a reciprocal trust between the enterprise and the stakeholder.
When we involve stakeholders in the decision-making process, and we communicate clearly the “why” and listen to their feedback and concerns, then we can strengthen the relationship.
Building Resilient Strategies
To conclude, by collecting multistakeholder data and integrating it with ESG
performance data, we open a whole new world of possibilities to determine if
the actions of an organization are building stakeholder trust or getting early
warning signals if they are eroding the Social License to Operate.
Getting insights into these questions can help build the type of resilience that
will be needed as we face the uncertainties associated with the transition to a
low-carbon economy. By bringing the voice of the stakeholder to the forefront
of ESG decision-making, and by adding the proper controls, we can help
bridge the trust gap between financial and non-financial data.
Now its your turn
By now, you have an in-depth understanding of why integrating ESG and Stakeholder Trust Engagement will be so important through 2023 and beyond to increase your organization’s resiliency and impact.
The question is:
Which strategy from today’s guide will you try first?
Are you going to implement a double materiality
assessment or map the network of your most influential stakeholders?
Let me know in the comments below.
