The importance, opportunities, and challenges of ESG and business ethics

By Chris Beehner

The behavior and motives of merchants and capitalists have been viewed with skepticism and mistrust for millennia. Mistrust of business further increases each time someone in business commits a questionable or dishonest act. While government regulators continually seek ways to mitigate inappropriate behavior, news headlines continue to emerge with stories about business leaders committing major ethical violations. The ethical scandals which infected global business at the beginning of the recent century sparked an increased focus on business ethics. The focus of business operations is no longer limited to generating shareholder profits, but now includes providing benefits to an increasing array of stakeholders.

With roots dating back to the 1960s, the term ESG (environmental, social, and governance) has achieved popularity as business leaders become more proactive in their efforts to operate ethically and responsibly. ESG is concerned with how a business interacts with the environment, cares for employees, communities, and customers, and governs itself. The transition from a narrow shareholder perspective to a broader stakeholder perspective requires leaders capable of thinking, managing, and influencing on a systemic level. The business leaders of tomorrow must develop dynamic system leadership styles and skills that are grounded in the future and not the past. The actions and strategies of the past no longer work, requiring new methods of ensuring organizations continue to survive and thrive.

ESG is not simply another business fad. Corporate ESG initiatives reflect a growing trend to overcome the negative side-effects and image of capitalism, by integrating ethics, values, and global concerns into corporate culture. Companies with high ESG ratings outperform competitors and incur lower capital costs (Fulton et al., 2012). Investors and lenders increasingly seek to invest in and loan money to businesses that behave responsibly. They frequently use ESG reports to assess business risk and growth opportunities when making financial decisions. Therefore, business leaders who seek to survive in the contemporary economic environment must develop and implement genuine ESG initiatives and programs.

In my recent book, System Leadership for Sustainability, I discussed the importance of ethical leadership for achieving sustainability. Ethical leaders are honest, respectful, place other people’s interests above their own, make impartial and equitable decisions, and are dedicated to community building.  Ethical leaders expand the ethical realm by acknowledging and responding to the needs of stakeholders, future generations, and the natural environment (Peterlin et al., 2015). It is this ethical, external focus that forms the foundation of ESG.  Leaders who demonstrate ethical, system leadership are capable of leading ESG-guided businesses to significant economic, environmental, and social success. Those who do not are more likely to appear in future business news headlines.

Beehner, C.G. (2020). System leadership for sustainability. Routledge.

Fulton, M., Kahn, B., & Sharples, C. (2012). Sustainable investing: Establishing long-term value and performance. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2222740.

Peterlin, J., Pearse, N.J., & Dimovski, V. (2015). Strategic decision making for organizational sustainability: The implications of servant leadership and sustainable leadership approaches. Economic & Business Review, 17(3), 273-290. https://doi.org/10.15458/85451.4