Boards of directors and C suite executives whose companies’ functions are all located within the confines of the firms’ home markets face far more complex—and commercially vital—business decisions about designing and executing effective ESG and sustainability strategies than they might think. Otherwise “domestic” firms are not immune to the porosity of the drive for sustainability emanating from foreign shores.
In contrast to impending ESG disclosure requirements, where compliance will be administered in effect by regimes instituted by home governments (or in time hopefully by regional, or possibly global, bodies if a common set of disclosure standards can be institutionalized), the commercial success of homebound businesses’ sustainability operational strategies will need to incorporate how their market competitors—whether of domestic or foreign origin—operate with respect to ESG parameters.
In today’s globalized economy, it is increasingly rare that commercial decisions in homebound firms’ markets made by their investors, customers, workers and other stakeholders turn significantly on the geographic origin of regulatory measures or incentives conditioning businesses’ sustainability operations. Such judgments are performance-based.
In effect, the success of homebound firms’ operational sustainability strategies will be determined by beyond-the-border market incentives and risks and opportunities. Corporate boards and the C suite executives they oversee would do well to ensure these facets are taken into account in the decisions they make about engendering sound corporate sustainability outcomes.
“Domestic Firm” Is A Misnomer for ESG Imperatives
Traditionally, “cross-border” is usually thought of in terms of the imports a firm purchases or the exports it sells abroad; the overseas investments the firm makes; or in terms of the foreign competitors operating in the firm’s home market because of these competitors’ own cross-border investments.
In the modern configuration of international markets, however, that is a myopic view. Arguably, such myopia is epitomized in firms’ oversight of both compliance and operational decisions regarding ESG metrics and corporate sustainability strategy. This is because most matters related to ESG and sustainability are becoming inherently transboundary in nature, as are the public policies affecting them.
Why do I say ESG and sustainability impacts and business decisions affecting them are inherently transboundary? Because they are rarely circumscribed by domestic geographic or market boundaries. Even for so-called “domestic firms.”
For decades, if not centuries, assessments and questions about the relationship between business activity and environmental conditions (“E”) were framed in this manner. Think: air pollution emitted by factories causing deleterious health effects in local populations.
But today—to state the obvious—most people think in terms of home country plant emissions contributing to warming of the atmosphere on a global basis. That is, transboundary contagion of some form is more the norm than the exception.
Moreover, the manifestation of beyond-the-border environmental degradation itself is hardly circumscribed by the location of a firm’s own operations per se—regardless of where in the world the facility is situated. In essence, environmental contaminants arising from the manufacturing and delivery of a firm’s inputs from afar (or sales of its outputs) cannot be disassociated from the business’ impacts on “E”.
Such was the case when fleets of cargo ships originating from China sat at sea for days, if not weeks, with engines running waiting to unload their containers at the Port of Los Angeles (or other ports in the U.S. or abroad) for delivery to U.S. markets during the height of the COVID pandemic in the aftermath of China going off-line.
For homebound businesses, say in the U.S., this is but one example illustrating how in the way in which competition with rivals (whether of domestic or foreign origin) is mediated, beyond-the-border delays and degradation of the environment relates to firm performance.
That the social —“S”— dimensions of a homebound business’ performance can be impacted by cross-border competition is epitomized by the operations of global supply chains.
The two starkest—and perhaps extreme—examples of this have received significant political attention and are subject to sanctions by G-7 governments: (i) sourcing agricultural and related products originating in Western China’s Xinjiang Region, where Beijing’s discriminatory treatment of the minority Uyghur population is well-documented and (ii) purchasing “conflict minerals” originating in central African countries mined by children captured by renegade local militias.
Governance aspects —“G”— of ESG are, of course, fundamental to the overall concept of sustainability and in many respects take on an integrative function.
The most telling example of its manifestation is how Western firms reacted to Russia’s invasion of Ukraine. Instead of exiting the Russia market as a result of home government-issued mandates or sanctions, the vast majority of such companies unilaterally withdrew—owing in large part to minimizing their exposure to reputational risk at home.
Ex post that has proven to be a sound strategy, inasmuch as the comparatively few Western firms that chose to remain in Russia have not fared well. Indeed, some of the iconic businesses that did not exit—such as Carlsberg and Danone—have found their assets expropriated by the Kremlin. It remains to be seen, of course, what will be the value of such assets should they be returned at the end of hostilities.
On the other hand, the firms that did exit presumably face the prospect of trying to re-enter the market in the future. It is unclear what costs will be entailed in doing so—not only the set-up costs but also the investment needed in building back brand loyalty and a consumer following. If experience is any guide, consumers in emerging markets tend to have long memories about the conduct of foreign-invested firms.
Fostering a Dialog Between Boards of Directors and C Suite Executives
Establishing and consolidating solid ground for robust dialog between board directors and C suite executives about the design, execution and evaluation of firms’ operational sustainability strategy is critical to the future of enterprises. Yet too often the discussions that do take place are seen as more perfunctory than substantively rigorous. To that end, here are three questions to be raised and discussed to help motivate a fulsome exchange:
Q1: How is our firm capitalizing competitively in the international sphere on ESG operational decisions being made today and assessing your competitors? Are our rivals gaining more market share/higher profits because they are operating more sustainably? How are you calculating ROI on sustainability—whether it is positive or negative? Is the focus on sales revenue; net earnings; returns on investment? How are we gauging our ability to attract better workers for the long-run performance of the business? Are we deploying multi-dimensional metrics?
Q2: Given the global nature of sustainability, who in the firm should be overseeing integrating sustainability throughout the company’s operations and what is the operational status of that role vis a vis the CEO? Where is that function located—both within the firm and geographically. How prospective is the firm’s “sustainability report” as opposed to solely a retroactive assessment? Are we using it as a competitive lever rather than a check-the-box exercise? How firm-wide is that exercise being conducted?
Q3: Analogous to the C-Suite, who on the board is intimately familiar with sustainability as an operational matter as opposed to an annual disclosure exercise, which is typically a look-back? Do our people have on-the-ground experience on sustainability in business operations in multiple international markets, since US firms’ boards of directors tend to be “behind the ball” on such matters compared with their cohorts across the G7?
Scenario Exercises
Scenario One. Your main competitor in your industry—also a U.S.-based firm—announces it will re-enter Russia, which was/is a valuable market, but is doing so not through direct operations in-country but as an exporter. Should the board discuss this with C suite, and what questions should be posed to make a go/no-go decision?
Scenario Two. The EPA has decided that a prohibited chemical available only from abroad that your firm used in the past as part of its manufacturing process poses less risk than previously thought, but the public is wary of the EPA’s decision. Switching back to that chemical would significantly lower your firm’s cost which in turn could result in your firm lowering the price it charges for the final product (of which the chemical is a component), expanding revenues and allow you to hire more workers. How should this be handled?
Going Forward
A one-sided focus on reporting compliance with ESG standards and regulations—a rear-view-mirror, static approach—rather than on how to infuse companies’ current and prospective operations, including investment in innovation to capitalize on sustainability opportunities and mitigation of risks—a market-oriented dynamic approach—will not be a winning approach.
It is important to have both on the Board and in the C-suite practitioners in sustainability and extensive on-the-ground international CG business experience. This is no substitute for having external advisers.
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