The evolving ESG agenda and its critical role, as not only a licence to operate for shipping companies in this decade and beyond and enabler of sailing through the challenges of the 21st century, but also as a driving force and key tool to thrive and secure business success
A new shipping reality
In the maritime industry, environmental challenges include air emissions and decarbonisation, sea biodiversity impacts due to ballast water, underwater noise affecting sea life, waste management, ship recycling and hazardous materials’ disposal, to name the main ones.
Social challenges include seafarers’ well-being, especially under Covid, health and safety, labour and human rights, training and development, cultural challenges among multinational crews, job creation, gender diversity and inclusion, dealing with bribery and corruption in ports, and improving relations with the communities and the wider public opinion, being a low-profile industry.
Decarbonisation is the key environmental challenge, while on the social front, securing all aspects of seafarers’ well-being and future, and communicating the essential services offered to humanity, should be high on our agenda.
The viability of a business model that has been efficient for decades transporting vital and basic goods, meeting humankind’s essential needs is under threat of disruption, despite its record in terms of safety and environmental soundness. Still, especially small and medium-sized companies (the backbone of the shipping industry) may simply perish if they do not embed sustainability and corporate responsibility in a demonstrable and substantiated way in their strategy through governance.
It is no longer enough for our industry to just do what we used to do, even if it is essential, proven, and efficient. We need to do more than this and communicate it using today’s language to respond to contemporary mandates.
Indeed, there is technological uncertainty and disruptive solutions are needed, pushing the technology envelope. It is important to push boundaries and technological innovation is a real need but not the decisive challenge today; technological challenges will be resolved, if there is the determination and direction to do so; fortunately it appears these are gaining momentum.
There is an urgent need to be a step ahead of regulation, as legislators often respond to crises after they have happened. To achieve and enhance business sustainability, we must create value beyond short-term shareholder expectations. Shareholders often have little interest in the long-term viability of a business. Business needs to make a sound profit and also use part of it to research, innovate, invest and develop value-creating strategies. We have already moved to a stakeholders’ economy, where value is shared with various stakeholders.
VUCA environment
The shipping industry is operating in an environment that is increasingly volatile, uncertain, complex, and ambiguous (VUCA).
The megatrend of sustainability is an overarching reality. Under its remit, all sorts of questions are raised. The neoliberal economic orthodoxy is itself challenged. Wealth disparities, climate change, and protectionism call it into question. Rising inequality, immigration, and unemployment may even lead to dramatic developments.
Changing demographics result in new working values and social purpose narratives that cannot be ignored, as millennials and Gen Z are taking the helm of government and business. Economic mobility is declining and meritocracy itself is questioned. Diversity and inclusion are promoted as sources of success across cultures.
Every business must be sensitive and responsible towards the signs of the times. Jack Welsh (ex-CEO of GE) reportedly said that if the rate of change on the outside exceeds the rate of change on the inside, then the end is near. This should not be allowed in our industry.
Vested interests fight changes when it is not obvious that change is required; when it becomes obvious, it may be too late to do anything about it. Transformational effectiveness is urgently needed, as opposed to the usual recipe for success of transactional efficiency.
The primacy of governance
In the new economic environment of stakeholders as opposed to shareholders, ambiguity of corporate purpose can be detrimental. However, clarity and sustainability messaging can secure a long-term licence to operate. The governance is the most critical challenge, barrier, and driver in securing success in the shipping business in this decade and beyond. It rests in the hands of the key decision makers, be it the board of directors or owners.
Against the old way of doing business, what is certain is that boards will not be able to assume business as usual in the coming decade. Millennials and Gen Z place high importance on responsibilities towards communities, people, employees, but also on offering essential goods and services.
There is a generational challenge involved, where people of a younger age and background need to be listened to as generators of new ideas and innovation. Their views need to be judged of course, yet with a combination of caution and open mindedness. To start with, when younger people have a view to share, boards’ ears should be as open and receptive as telecommunication dishes. The old style of big egos and unchallenged experience should be over: this is an existential question.
We need to look outside our industry’s ‘silo’ and engage effectively in the ESG conversation with third parties and external stakeholders, who have been increasing their pressure, as they largely do not understand the way our industry operates and thus its level of commitment and achievement.
Clarity of purpose and principles, as well as risk management, need to be reflected in value and strategic planning. From governance values down to management guidelines, adaptation to societal mandates and worthwhile aims making a difference in peoples’ lives should be translated into aims and new processes on how to get there.
Shaping a new vision
In the post-pandemic world, there have been calls for ‘a maritime renaissance’ where expectations are to build back better and greener in a way that transforms the way in which companies work with partners. In this new business, economic and societal environment, it is imperative for shipping companies to proactively collaborate with like-minded businesses. A vision requiring collaboration should be part of a new mindset.
Increased employee engagement and retention, stronger corporate reputation, an explicit social purpose of the company to shield it from activist campaigns, and better access to capital, all aim at securing a licence to operate in the new era already here. A compelling narrative, distinctive for each company and its brand, should be meaningful to its stakeholders, motivating to its employees, resonant in the marketplace, aligned with its purpose and consistent with its values.
In the stakeholders’ economic environment of ESG expectations, which does not only affect shipping companies, first movers will play a critical role in dragging the industry beyond its safe space and rewriting the rulebook. Leadership is key to long-term performance and so are companies with a strong sense of purpose.
Indeed, big changes lie ahead in the makeup of the industry, with a gravitational pull towards scale and it becoming a lot more industrial. Shipping is facing a tendency to consolidate and scale to raise more money, as much is expected from technology and achieving a sustainable green future through technological innovation. By setting a clear forward-looking direction and objectives, the existing trade-offs should be reconceptualised to make sustainability a catalyst for innovation and vice-versa.
It is imperative to shift our mind in terms of our time horizon to a longer-term orientation, and of the need to address holistically the expectations of a much wider range of stakeholders.
A compelling and distinctive ESG story and purpose needs to be set. Making money is an insufficient reason to exist, as is a market share aspiration. A purpose should answer why employees should work for the company and what the world would lose if the company disappeared tomorrow.
An overall aim is to enhance reputation by taking transparent and leading sustainability initiatives, and thus securing the trust of material stakeholders. A vision should reflect the area(s) where the company can have a significant impact. The one thing it wants to be known for can best contribute. An ESG strategy needs to be focused, credible, distinctive, visionary, and inspiring.
How to deliver
There is a need to overhaul strategy via a sustainability and ESG shift in the conceptualisation of an organisation’s or company’s mission. A need to embrace the ESG language and framework of thinking, and renew its toolbox. Time, resources, managerial attention and effort need to find the right balance between:
Achieving the goal asks for a sustainability strategy and operating plan, embedding an ESG mindset across strategy, culture, operations, brand and story. The processes to get there involve defining stakeholders and beneficiaries, setting strategic objectives and priorities, and mapping targets, action plan, KPIs and data, as well as effective communication.
When implementing ESG, it is about leadership and people, but in the end actions will translate to positive environmental outcomes. Decarbonisation is the key challenge of sustainability for shipping. However, safety should remain an integral part of operations on the way forward.
As drivers for the envisaged transformations, there are policy and regulatory frameworks on one hand and significant investment challenges and opportunities on the other. ESG can act as a driver of profits, a customer and talent magnet, and an innovation engine.
Companies are expected to provide sustainability reporting and communication of information about their performance to the outside world on a regular basis and in a structured way, while being mindful of the societal, economic, and technological realities of the energy transition.
The complexity of ESG increases the challenge for smaller organisations, which need to bring in new operating models, technology, and a more diverse generation of talent, as well as adopt an integrated value chain view. In this process, the topics which are most material (higher impact ones) need to be understood and addressed via appropriate initiatives. These may include monitoring and reporting. Concerned stakeholders, beyond shareholders, involve the environment, communities, customers, and employees.
ESG is a clear source of competitive advantage over other organisations in securing and generating business, by serving and promoting a company’s sustainability credentials and aligning them with third parties’ environmental criteria. The key challenge in the ESG process is to change the company culture. Employees need to be inspired by the ESG strategy and continuously educated about it as part of their job, because it is more about a journey than an end in itself.
The role of people
However, a clear business focus and compelling mission are not enough to deliver. Resources and competencies are required, and this means people and organisation. This entails talent management, training and personal development, as well as feedback mechanisms.
People are the most important asset of an organisation, after its reputation… and both do not appear on its balance sheet (a saying attributed H Ford). The big question is how to attract and retain good people to the shipping industry through motivation. The younger generations expect new drivers in tandem with the challenges of today and tomorrow. This equally applies to their value system, priorities and view of society and employment.
Unfortunately, the shipping industry has a rather poor image, burdened by unappealing traditional ways of working. The industry will struggle to upskill its talent pool without offering them challenging goals and reshaping the culture of companies, by placing importance on simple, yet important aspects such as mental health and wellbeing, /life balance and flexible, hybrid working policies, before addressing more challenging ones such as diversity and inclusion.
Apart from prioritising extra care for and wellbeing of seafarers, it is more than ever down to people and leadership to change mindsets and bring companies to a new era. All in all, our industry needs to invest in expertise.
Why governance is now the most important ESG element for shipping
That the world is migrating towards a more ESG-friendly future is an understatement. It is clear what ESG is not: it is not about greenwashing or empty commitments. It does not concern obligatory disclosures either. The real and distinctive value of ESG lies in what a company does beyond regulatory requirements or any other enforcement. More than a scorecard, ESG can result in better-managed businesses.
Looking at the big picture, economy is a subset of ecology and not the other way round. Originating in a new mindset, ESG aspires to a long-term sustainable model. ESG initiatives should be viewed as long-term investments in business resilience and has to be in the core of the business.
It is no longer enough for companies to attempt to justify their role or be apologetic. They must proactively justify the benefits of their existence and purpose. Our industry has always had a very strong commitment to serving societies across the world, by providing essential goods, creating wealth and employment. It is important we do a better job of communicating that impact. Any missed opportunities are increasingly a liability.
ESG as a vital criterion of business survival is preventative and addresses:
The ESG is a revolution as it entails:
ESG is overall about a company’s strategy, and thus requires ESG competency at the board of directors’ level, apart from shipping competency, and more specifically:
