Environmental, Social, and Governance (ESG) principles have emerged as a transformative force in the business world since it was introduced several years ago, pushing companies to consider broader impacts beyond financial returns. It aims to create a sustainable and equitable future by addressing environmental issues, social responsibilities, and governance practices.
However, as of now, have we ever felt any momentous change in corporate behavior and societal outcomes? It may not always be as significant as desired for several reasons, and the “Tragedy of the Commons” concept is one of those factors to consider.
The tragedy of the commons was first described in a pamphlet by the economist William Forster Lloyed in 1833 in a discussion of the overgrazing of cattle on a village common area and then reintroduced and revived by the ecologist Garret Hardin in 1968. Yes, that is after more than 100 years! It describes what happens when many individuals all share a limited resource. Hardin argued that these situations pit short-term self-interest against the common good, and these ends badly for everyone. The key feature of tragedy of the commons is that it provides opportunities for an individual to benefit himself or herself while spreading negative effects across the larger population.
In the context of ESG, the tragedy of the commons poses a huge obstacle to achieving sustainability goals. For example, when one company in an industry employs unsustainable but cheap technology and practices prioritizing short-term profitability over long-term sustainability, it might gain a temporary competitive advantage over the others. However, the shared resources of the industry, such as the environment or social cohesion, are depleted, affecting everyone’s interests. Optimizing for self-interests in the short term is not optimal for anyone in the long term.
Such might seem a simplified illustration, but the tragedy of the commons plays out in the more complex systems of life. There are varying reasons, valid, moral, or otherwise, why certain companies or economies, in broader sense, cannot or are not able to implement sustainability in their operations, and these reasons need to be recognized to help those that are trying. Given the benefit of the doubt, of course, every company or economy wants to be sustainable; however, implementing ESG principles in operations will entail huge additional costs. Leapfrogging by adopting more advanced and sustainable solutions and strategies instead of older, inefficient, or unsustainable technologies, practices, or models, as suggested by the developed economies, might cost so much burden for those that are trying or still starting from the emerging or developing economies.
This gap between the front runners and those that are trying cannot be sustainably addressed through individual compliance and adoption of ESG principles but rather through shared responsibility. This poses a challenge for the front runners to have a sense of moral responsibility to help those that are trying to dispel the concept of the tragedy of the commons. As an African proverb about the value of community tells us, “If you want to run fast, go alone, but if you want to run far, go together.”
Embracing collective responsibility
To overcome the tragedy of the commons, business leaders must embrace collective responsibility. By recognizing that ESG implementation is not just an individual endeavor, but a collaborative effort that impacts the entire ecosystem, leaders can foster a sense of shared responsibility towards sustainability. For example, through supply chain sustainability, suppliers and partners within a certain ecosystem can collaborate to ensure that they adhere to ESG principles. The ecosystem can perform supply chain audits and transparency initiatives to track and improve ESG performance throughout the supply chain.
Collaboration and industry measurement and reporting
By setting common sustainability goals and metrics within an industry or ecosystem, companies can collectively work towards shared objectives and avoid the competitive disadvantage that might arise from individual efforts. This can be done by companies engaging in industry-wide benchmarking exercises to assess and compare ESG performance and then cultivating industry-wide collaboration to develop common ESG standards and best practices. To harmonize the goals and metrics within the industry, companies can collaboratively develop standardized methodologies for measuring and reporting ESG impact.
Entangling interlocking stakeholders
Stakeholder engagement is a vital component in ESG success. However, tackling conflicting and interlocking stakeholders within an industry or ecosystem poses additional challenges. On top of what stakeholder engagement process requires, an independent ethics committee is suggested to be formed, consisting of experts in sustainability and ethics, who review and evaluate potential conflicts of interest among interlocking stakeholders. The industry can also establish clear conflict resolution procedures to address disputes or concerns related to conflicts of interest. This includes a process for stakeholders to raise objections and seek resolutions. And, as a commitment to transparency, the industry should report to the stakeholders all decisions, including those involving potential conflicts of interest and how conflicts were identified, managed, or mitigated.
The effectiveness of ESG lies in the ability of business leaders to navigate the challenges posed by the tragedy of the commons and work collaboratively towards collective sustainability. It is through these collective efforts that the true effectiveness of ESG can be realized, paving the way for a more sustainable future. When the tragedy of the commons applies, remember Hardin’s lesson, what is good for all of us is good for each of us.
As published in The Manila Times, dated 04 October 2023
