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Sustainability
Trust as a platform for ESG governance and competitive advantageÂ
Vital to trade and commerce throughout history, trust is more important than ever in the age of global warming and artificial intelligence.Â
Trust has been instrumental in societal development and economic growth throughout history. The vast network of roads and trade routes that enabled the rise of the Roman empire, for example, was underpinned by trust in the rule of law and the guarantee of safe travel, allowing commerce to flourish. The Han dynasty in China similarly prospered through the Silk Road, a network of trade routes relying on mutual trust between merchants, officials, and communities across vast distances. And, in medieval Europe, the âLetter of Trustâ was essential to trade and commerce in a war-torn continent, playing a key role in the development of modern banking and finance systems.
Arguably, trust is even more vital today as humanity combats the existential threat of global warming by transforming every aspect of industry and commerce. This transformation is inherently complex and challenging, requiring significant changes in business operations, government regulations, and consumption and lifestyle habits. Without trust, this transformation is impossible.
Trust in the corporate world
Trust is also fundamental in the corporate world. It is the linchpin connecting stakeholders in the value chain and underpinning brand reputation, which ensures loyalty and repeat business. For example, US computer and cell phone manufacturer Apple engenders trust that translates into sustained consumer preference, with many loyal customers the world over vying to acquire the latest iPhone model as soon as it is released.
Employees, too, are crucial stakeholders whose trust in their employer affects productivity and innovation. Organizations that prioritize transparency, fair practices, and employee wellbeing, such as Google and Salesforce, typically enjoy high levels of employee engagement, lower turnover rates, and talent recruitment.
Investors are another critical group whose trust is essential for a companyâs financial health. Transparent reporting, ethical business practices, and consistent performance foster investor confidence and an environment that is more conducive to raising fresh capital, while trust greatly enhances the ability of a company to build and retain a competitive advantage.
âOn the other hand, the growth of AI capabilities has facilitated wrongdoing.â
A new role for trust
Trust has a new role to play today in underwriting corporate commitment to the green business transformation. It is a critical factor in distinguishing those companies who are truly committed to combating climate change from those who are merely intent on capitalizing on the trend without making substantial changes, and a breach of such trust can prove costly for offenders. For example, in January 2021, Japanese carmaker Toyota was fined $180m by the US Justice Department for delaying the filing of emissions-related defect reports.
But the advent of the digital era has complicated trust relationships between governments and citizens, and between companies and consumers. On the one hand, artificial intelligence (AI) has enhanced transparency and consistency of operations and reporting â critical components for building trust â in many sectors.
On the other hand, the growth of AI capabilities has facilitated wrongdoing. Used with malign intent, the technology enables the creation of bogus authentication, leading to the exponential multiplication of scams and cyber-crimes, and a widening mistrust of processes and systems.
Even in the absence of ill intent, the opaque nature of some AI algorithms can create a âblack boxâ scenario, where decisions are made without clear human oversight. Such non-transparent decision-making readily undermines trust. One example is the carbon credit market. While it has the potential to be a critical tool in the fight against climate change, a lack of transparency regarding project quality, performance, and pricing has eroded trust in the scheme, greatly impeding the development of the mechanism.
The improper application of AI in environmental, social, and governance (ESG) processes has the potential to undermine effective governance and erode stakeholder trust.
Enhancing and guaranteeing trust
Trust is hard to build and easy to lose. And, in the context of ever-increasing environmental concerns, it has a vital role to play as the sine qua non of the green transformation.
Yet shady dealings abound, eroding trust. The damage that greenwashing and other pernicious corporate practices do to the sustainability case goes beyond their immediate scope. For example, German automobile manufacturer Volkswagenâs emissions-cheating scandal, which allowed its engines to emit nitrogen oxide pollutants up to 40 times above levels allowed in the US, not only did huge reputational damage to the company but also greatly undermined consumer confidence in vehicle manufacturersâ testing regimes (and green credentials) globally.
Indeed, such malign actions undermine the entire sustainability agenda. We need structures, processes, and platforms to enhance and guarantee trust.
The improper application of AI in environmental, social, and governance (ESG) processes has the potential to undermine effective governance and erode stakeholder trust. Additionally, the reliance on AI to manage sensitive ESG data introduces risks around data privacy and security, potentially leading to stakeholder concerns regarding how data is used and protected.
Fortunately, solutions to mitigate risks and secure data and processes do exist, and keep on being developed. Work is underway to secure carbon credits to enable emissions offsetting, and adapted solutions can ensure stakeholder confidence in green initiatives and certify that companies are, indeed, embedding their sustainability claims in their strategies.
This confidence is necessary to build the trust that fosters collaboration and cooperation among all actors and underpin stakeholder engagement; thereby supporting effective regulatory compliance via transparent reporting.
Three ways in which trust can help the green transformation
1 – Embedding ESG goals in corporate strategy and evaluation
Advanced secure tracking and verification solutions can play a crucial role in monitoring and validating a companyâs progress toward its ESG and sustainability goals. Such technologies can accurately track supply chains, verify the authenticity of sustainable materials, and monitor the environmental impact of operations. This accurate and verifiable tracking enables companies to measure their ESG performance more effectively and align it with their corporate strategy.
Example: Danish toy maker the LEGO Group. By making environmental sustainability a priority, including producing pieces made from plant-based polyethylene and aiming to make all bricks sustainable by 2030, LEGO ranked first in the Global RepTrakÂŽ100 survey for the second year in a row in 2024 and has seen consistent revenue growth over the past 12 years.
2 – Consumer and stakeholder engagement and inclusivity
Solutions for product authentication and traceability can be leveraged to engage stakeholders. For example, by providing consumers with detailed information about the sustainability and ethical sourcing of products through secure QR codes and blockchain-based tracking, companies can foster a higher level of trust with their customers. These technologies also facilitate inclusive platforms for stakeholder feedback, ensuring that all voices are heard and enhancing the inclusivity of corporate governance practices.
Example: US multinational retail corporation Walmart. In 2018 Walmart partnered with IBM to use blockchain technology to improve the traceability of its food supply chain. The system promotes food safety and reduces waste by ensuring that only affected products are recalled, rather than entire batches.
3 – Transparent reporting and disclosure
By using technologies to authenticate and secure ESG data, companies can ensure that their sustainability reports, disclosures, and other public documents are tamper-proof and verifiable. This increases stakeholder trust in the disclosed information and sets a higher standard for transparency in corporate reporting.
Example: US semiconductor and computer manufacturer Intel. In September 2024 Intel was ranked the best overall transparent company in the 2024 Transparency Awards for showcasing âtrue transparencyâ through its âconsistent and thorough disclosures, effectively communicating its mission, vision, and strategy with clear introductions and summaries across all documents.â
In the European Union notably, but also in many other countries around the world, a stringent regulatory environment is being built that will greatly impact trade and commerce.
The role of education in building trust
Educating all stakeholders on ESG awareness and readiness is essential for building trust in todayâs corporate and societal environments. This education bridges the gap between corporate actions and stakeholder expectations, aligning ESG strategies with stakeholder values to enhance credibility and trust.
Furthermore, the education of government leaders on ESG principles is paramount for fostering public trust and ensuring effective governance. In the European Union notably, but also in many other countries around the world, a stringent regulatory environment is being built that will greatly impact trade and commerce. Companies of all sizes will have to understand requirements, adapt to new parameters, and comply with different regulations.
This will be a newly constrained environment, but it will also bring opportunities to differentiate compliant production and economic activity to great advantage, with positive financial results. Opportunities worth grasping, through methods worth mastering.
Authors
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