Criteria for Evaluating ESG Practices
1 a. Common Environmental, Social, and the Governance (ESG) Practices that Businesses Should Implement
Environmental, Social, and Governance (ESG) practices represent a standard for the performance of an organisation that socially aware investors use for screening potential investments (Linnenluecke, 2022). The environmental criteria consider how a firm performs as the factor of nature. Social criteria examine how it manages the relationship with the suppliers, employees, customers, and the communities within which it operates. Governance, on the other hand, represents the leadership of the firm, the executive pay, internal control, audits, and the rights of the shareholders.
The Environmental, Social, and Governance (ESG) practices that a business should implement are as follows ( Atan et al., 2016):
Environmental: This comprises energy utilization of a firm, waste and pollution generated, conservation of the natural resource, and the treatment of the animals. The criteria also aid in evaluating the environmental risk that a company might face and how a firm manages such risk. For instance, there could be issues associated with the ownership of the contaminated land, the disposal of hazardous waste, the management of toxic emissions, or its compliance with governmental regulations related to the environment.
Social: This essentially takes into consideration the business relationships of a firm. It involves taking into consideration the aspect of working with the suppliers. It also considers whether a firm’s involvement with the local community in terms of donating its profit percentage to the community or employee encouragement for providing volunteer work. A firm’s working condition is also considered in terms of whether higher regard is shown for the health and safety of employees, followed by consideration of the stakeholder interest.
Governance: Regarding governance, the investors would prefer to know whether the firm uses transparent and accurate accounting methods and whether stockholders are allowed to vote on key issues. Investors mostly look for assurances whether the firm can avoid the conflict of interest in the choice of the board members without getting involved in the illegal practice.
b. Define What Sustainable Development Is. Illustrate How Good ESG Practices In A Business Will Support Sustainable Development.
Sustainable development represents the development that can meet the requirements of the present without negotiating the ability of the future generations to meet their needs (Carley & Christie, 2017). The focus of sustainable development is, however, far beyond the environment. It also indicates a healthy, strong, and just society. It indicates meeting the diverse needs of all the people in the future and the existing communities, promoting personal well-being, inclusion, social cohesion, and the creation of equal opportunity.
It is to be noted that business remains intertwined with environmental, social, and governance (ESG) concerns. Incorporating good practices of ESG in daily operations contributes to the creation of value which leads to sustainable development. The values created through good practices of ESG are as follows (Henisz, Koller & Nuttall, 2019):
- Facilitation of the Top-Line Development: Stronger ESG Proposition aids firms in tapping newer markets and existing into existing ones. With governing authorities trusting the corporate actors, they become increasingly likely to award them with the approval, access, and licenses that can afford fresh growth opportunities.
- Reduction of Cost: ESG also can reduce the cost sustainably. Amongst the other advantages, the execution of the ESG efficiently helps in combating the rising operational expenses such as the cost of the raw material and the actual cost of carbon or water. According to Mckinsey’s research, this can impact the operating profits by about 60 per cent.
- Minimization of the Regulatory and the Legal Interventions: A strong external value proposition of the firm enables them towards achieving a greater level of strategic freedom and easing of the regulatory pressure. In instances across geographies and sectors, ESG e aids in reducing the risk of a firm related to the adverse action of the government. It also engenders governmental support.
- Increase of Employee Productivity: An effective good practice of ESG aids firms in attracting and retaining quality employees and enhance employee motivation through instilling purpose and an increase of overall productivity.
- Optimization of Investment and the Capital Expenditure: A stronger ESG proposition will enhance the investment returns through the allocation of capital towards promising and sustainable opportunities such as reduction of waste, scrubbers and renewables. It also aids firms in avoiding the stranded investment, which might not pay off due to the longer-term environmental issue
Thus, it can be said that the good practices of ESG create value that contributes to sustainable development.
2a. Explanation of the Saying “ Quality is Free”
Environmental Criteria
“ Quality is Free,” as put forward by Philip B Crosby, does not represent a complete statement (Gerolamo et al., 2014). It is only valid when subjected to specific conditions. The explanation mentioned below shall make things clearer.
The quality of products might be viewed in terms of two perspectives. One is the presence of the features and the characteristics in meeting the customer’s needs and the freedom from deficiencies (Kumar, Rajun& Kumar, 2016). The former is often known as the ‘quality of design’ while the latter is the ‘quality of conformance.’ When it comes to the cost, improving the design quality shall always imply a higher cost. For instance, a television of higher resolution happens to be costlier compared to television with lower resolution considering other aspects remaining constant or gold of 24 carat is much costlier compared to 20-carat gold due to enhanced purity of gold. In general, whenever there is an upgradation of specification, the design quality gets better, thus making products costlier.
When it comes to the quality of the conformance, it indicates the degree to which the products can meet the specific requirements. When the quality of the conformance is lower, it indicates that most of the products are either face rejection or require some kind of repair. It acts as a massive loss to the organization. Experience indicates that if the quality of the conformance is improved through the usage of either a skilled workforce or higher-end machines, then the additional cost incurred by the firm shall be offset by savings achieved as a result of the rework or the cost of rejection. It is what is meant by the phrase “ Quality is Free.” But here also, there exists a gap. If a firm improves the conformance quality, then there will be a point reached known as the optimum point outside which reduction in the rework or the rejection cost is lesser in comparison to the amount of money spent on the improvement of the conformance level. It indicates that quality would not be free beyond an optimum point. Therefore, the law of diminishing return can be related to quality. Thus, it can be summed up that “ Quality is Free” remains effective only for Quality of Conformance, especially when the conformance levels remain lower.
b. For Each of Crosby’s Absolutes, Discuss and Provide an Example of How Employees could Implement the Absolute While Taking the Orders and Managing the Monetary Transaction or Making Bubble Tea For Customers.
- Quality Of Conformance To The Requirements: It indicates the transformation of the implied requirements of customers into the stated requirements thereby meeting all the mentioned requirements while minimizing unfilled requirements and meeting needs in a repeatable and consistent fashion (Carson, 2015). For example, this implies that to maintain quality employees should be able to make Bubble Tea for customers as per the mentioned requirements in a repeatable and consistent manner. It involves the interpretation of the customer’s needs.
- Quality Is Achieved By Prevention and Not By Appraisal: According to Philip B Crosby, the foundation of quality lies in prevention culture. It does not imply that the management will be able to delegate to the quality control division. Quality implies doing what is being committed and hence is not an additional factor but a key aspect of a successful organization. For example, the employees at the Bubble Tea Outlet requires to learn the art of handling customers for completed transactions which would indicate a key point in the business pyramid. The sharp tip of this pyramid refers to the activities initiated to deposit the cheque into the outlet’s account. The greater mass below the peak indicates various actions that require to be performed by the employees for receiving the payment.
- Quality has a performance standard of Zero Defects: According to Crosby, when there exist zero defects, no cost seems to be associated with the poor quality issues. Therefore, quality is considered free. “ Zero Defects” basically represents a philosophy, a movement or a mentality (Ross, 2017). It does not represent a program nor does it have distinctive steps for following or any rules that must be followed. It makes the concept of zero defect effective and adaptable to any business, situation, industry or profession. It is also considered a standard against which any process, system, outcome or action might be analyzed. Zero defect does imply being perfect, and it is about changing perspectives. For example, the employees at the Bubble Tea outlet can opt for maintaining the aspect of Zero defects through:
- Recognizing the higher cost related to the quality issues
- Working proactively for addressing and identifying any flaws in the system and the process that allows the occurrence of defects
- Strive towards continuously improving the process.
- Quality Is Measured By The Price Of Nonconformance: The cost related to the non-conformance indicates the money that is spent by a firm whenever it faces failure for ensuring the maintenance of the required quality of the products or services. The cost is usually incurred due to failure in the process of manufacturing. For example, the employees at Bubble Tea should ensure that there is no manufacturing failure and a cost incurred due to quality issues.
References:
Atan, R. U. H. A. Y. A., Razali, F. A., Said, J. A. M. A. L. I. A. H., & Zainun, S. A. U. N. A. H. (2016). Environmental, social and governance (ESG) disclosure and its effect on firm’s performance: A comparative study. International Journal of Economics and Management, 10(2), 355-37
Carley, M., & Christie, I. (2017). Managing sustainable development. Routledge.
Carson, R. S. (2015, October). Implementing structured requirements to improve requirements quality. In INCOSE International Symposium (Vol. 25, No. 1, pp. 54-67).
Gerolamo, M. C., Poltronieri, C. F., Yamada, T. T., & Cintra, A. L. (2014). Quality Management: How do Brazilian Companies use it?. Procedia-Social and Behavioral Sciences, 143, 995-1000.
Henisz., W, Koller, T & Nuttall., R., (2019). Five ways that ESG creates value. [Online]. Available at https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx
Kumar, P., Raju, N. V. S., & Kumar, M. V. (2016). Quality of quality definitions-an analysis. International Journal of Scientific Engineering and Technology, 5(3), 142-148
Linnenluecke, M. K. (2022). Environmental, social and governance (ESG) performance in the context of multinational business research. Multinational Business Review.
Ross, J. E. (2017). Total quality management: Text, cases, and readings. Routledge.
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