Government is holding back the businesses it owns from addressing ESG issues

It’s been argued that businesses have begun to lead government on tackling climate change and addressing other ESG issues. Edelman's latest global Trust Barometer has also found that business is the only trusted institution, and is well ahead of government including on the question of which institution can solve societal problems. This is perhaps not surprising. While many governments fear delivering on social and environmental agendas would mean, amongst other measures, imposing stifling regulations on businesses, big businesses tend to invest for the long term and therefore want certainty. In the absence of government action, some are following the science and statistics for themselves and realising that any investment that increases emissions, increases vulnerability to extreme weather or undermines the communities in which they operate should be avoided, partly because it will likely be devalued by future government regulation - when government eventually catches up.

Where does this leave government-owned or highly regulated businesses and arms-length bodies? The above argument is largely based on the actions and commitments of some major global companies with shareholders to answer to. However, there are many large companies and organisations wholly owned or regulated by government that also want to plan for the future across the full ESG range of issues. However, unlike the private sector, they are restricted by how, in the UK at least, government decides spending on the basis of budgets and value for money, rather than ambition or purpose. For example, while a private sector business plan will be centred on objectives and make the case for the scale of investment required to achieve those objectives, a government business will be treated the same way as a government department, and told to achieve as much value as possible within a finite funding envelope, while also being restricted from certain activities. The former objectives-centred approach includes space for non-financial objectives such as emissions reductions, and the latter budget-centred approach does not.

Governments are certainly interested in ESG issues, but their approach of setting secondary ESG targets is no match for integrating them into core objectives. For example, in rail, the Treasury sets a relatively short-term operational budget for the running of train services, with that budget set as close as possible to the expected fare income over the same period. The aim is for those services to wash their face as far as possible. Given the impact of the pandemic in passenger numbers and therefore fare income, the Treasury is putting more money into the system than anticipated and is, as a result, having the Department for Transport (DfT) squeeze costs by reducing the number of train services. The DfT does have ESG aims that it asks the rail industry to achieve but these do not figure within the core calculation of revenue and cost that shape the big decisions.

The train operators themselves have a different perspective as they have a business not government culture, and therefore think about purpose and objectives before or at least alongside budgets. For example, ask a train operator to help reduce emissions and they will rightly point out that trains are already low-emission and therefore, to reduce transport emissions, the answer is to achieve modal shift from car and air to train. To achieve that, the railway needs extra capacity so it can reduce fares without causing overcrowding. In other words, more trains not fewer. They will then go about modelling the scale of the opportunity, in terms of how many additional people could be realistically shifted from other modes to rail, reducing emissions and boosting fare income, and what value this would bring to the communities rail serves. Following that, they will develop a costed plan to achieve the shift, and take it to government. At that point, government rejects the plan and tells the rail companies to cut costs by running fewer services, and the two sides realise that they are speaking different languages.

Government infrastructure investment is a little better, as the investment cases brought forward have ESG numbers built in and the projects are generally so far away from making an income that the Treasury cannot force decisions on a profit and loss basis to the same degree. However, investment projects are of course also vulnerable to having their ambition and purpose scaled back in order to not break Treasury budget lines. In addition, the Treasury’s separation between day-to-day spending and investment/infrastructure means that it struggles to tolerate government-owned businesses delivering investment alongside day-to-day services, preferring to put investment decisions through a different, clunkier and often more political process.

So, what’s the answer? Many businesses are increasingly realising that their purpose is not raising revenue, and perhaps never was. Their purpose is delivering value to society, and if they get their product, workforce and pricing decisions right, they will make a profit as well as deliver broader economic, environmental and social value, or at least reduce their negative impacts in these areas. Yes, they have financial targets, and these nearly always take priority, but they also have ESG targets and understand that their strategic decisions affect the full range of outcomes. Until governments adopt the same mindset, government-owned businesses will be trapped, as will government departments and the ambitions of policy makers.

One may assume governments understand that they are not running a profit and loss spreadsheet but have a broader aim of supporting society. It was, for example, government that legislated for businesses to publish an annual statement on the measures they are taking to prevent modern slavery in their supply chains. However, what government wants for others is all too often too good for itself. The Health Secretary's recent commitment that the NHS will stop procuring from suppliers likely using slaves is welcome but implies that, despite NHS organisations publishing modern slavery statements in recent years, the organisation has not, as a whole, dealt with the issue. Why is this? It cannot help that all big government budget decisions must go through the Treasury, resulting in the UK government shoe horning its strategic ambitions into a profit and loss mindset and, as a result, hampering its ability to achieve broad outcomes. It’s time for governments to end their fiscal obsession and, for example, reform the annual budget and longer term comprehensive spending reviews to be ESG objectives and associated ESG budgets. Then departments and government-owned businesses can start to try and achieve those objectives rather than pay them lip service while only really tracking costs.

If you think this is all fluffy stuff, think again. Government departments and the businesses and arms-length bodies that they own churn out press releases highlighting how much they are spending on public services and infrastructure. However, take these to focus groups and you will find voters either not trusting the numbers or even thinking they highlight waste. What they want to know is what the spending will deliver, not in terms of how many widgets will be funded, but what this means for them and their families and communities. As government and its businesses struggle, at the behest of Treasury culture, to maintain clear objectives, they cannot answer these questions, even broadly. This, rightfully, leads to public frustration.

So, next time you read that the government is acting without explaining the desired outcome, or that ministers have been ordered to an urgent meeting with lists of what they are already doing to solve an issue, ask yourself whether government is truly acting with purpose. Then imagine you are working in the government-owned business or arms-length body behind that announcement (if you aren’t already), and imagine the frustration of trying to achieve outcomes for the country despite rather than supported by your owner. The Health Secretary admitting that that government and the NHS may have bought PPE from suppliers using slaves shows the government has a lot of catching up to do.