Five Things Every Company Should Know about ESG

One of the most important global movements of our time is unfolding right in front of us: the evolution of business toward a more sustainable future.

The move toward long-term sustainable value creation is no longer an option, but rather a growing imperative driven by socially and environmentally aware investors, customers, employees, and partners. Every company is going to need to understand and act on truly material Environmental, Social and Governance (ESG) issues to remain relevant and competitive. There’s no getting around the fact that you will be scored, measured, and judged.

The question is whether you will drive that process or be driven by it.

The most recent Edelman’s Earned Brand Study showed that 66% of consumers globally will choose, switch, avoid, or boycott brands based on the company’s stance on political or social issues. And if the events of 2020 have taught us anything, it’s that businesses are no longer able to sidestep taking a stand on political and social issues. There’s a lot at stake for companies of all types and sizes.

Businesses that simply react to an increasingly broad array of standards and expectations defined by others will inevitably over-invest and underperform. 

But businesses that move decisively to incorporate sustainable value creation into their core strategy will create a competitive advantage and real, measurable increases in enterprise value.

So, let’s start with five basic truths that every company entering this brave new world needs to know.

1. Sustainability is about seeing and creating value differently.
It doesn’t matter whether you call it Sustainability, Corporate Social Responsibility (CSR), Conscious Capitalism, ESG, or any number of other competing labels. The movement to integrate sustainable and responsible business practices into every area of core enterprise strategy is becoming a priority for organizations large and small all over the world.

Why? Not just because it is the right thing to do for people and the planet, but because it’s also the right thing to do for costs and profits. 

Take diversity for example. A recent BCG study revealed that companies with more diverse management teams have 19% higher revenues due to innovation, and 9% higher EBIT margins. Racial and gender diversity (which drive cognitive diversity) are not just ethical or compliance issues, they are performance issues.

At its core, ESG is about seeing and creating value differently. Businesses generally do a good job of recognizing and managing economic capital. That’s a great start, but it ignores some fundamental and powerful assets in the process.

We like to recommend that our clients expand their understanding of value to include social capital, natural capital, and strategic capital, all of which can be optimized to generate tangible outcomes that help companies do less harm, more good, and increase bottom-line performance. We often find that clients are underinvesting in these resources and leaving real opportunities and profits on the table as a result.

2. Standards exist, but a universal approach doesn’t.
It’s fair to say that when it comes to standards and metrics, we’re in the Wild West phase of this transition to a more sustainable and responsible form of capitalism. There is no single, universally agreed standard by which a business can measure and compare itself when it comes to ESG practices.

Globally recognized standards, such as the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB), do exist and are widely referenced. But there are also dozens of emerging standards and hundreds of potential metrics being used by a wide variety of stakeholders.

The takeaway? There is no one “right” way to build long-term sustainability into your business. Instead, there are many right ways.

How you pursue sustainable business objectives is often as individual as your organization itself. In fact, integrating ESG into your core strategy can be a highly creative and innovative process based on how you elect to solve problems and create value.

Understanding and aligning to one or several key standards is important to assure transparency and materiality (see the next issue), but it’s important to realize that no one holds the keys to your success and performance except you.

3. Success depends on balancing materiality and strategic importance.
Materiality is an important concept in creating a sustainable path forward. Just as with financial materiality, social or environmental materiality refers to the relative importance or impact of an issue to a company and its stakeholders.

For example, the carbon emissions from a coal-fired power plant are likely to be the most material ESG issue it faces because those emissions create negative impacts on a global scale. The concept of materiality is critical in ESG issue advancement because it helps businesses focus on areas of highest impact, both positive and negative.

The counterbalance to materiality for most businesses is strategic importance. What are the areas and efforts within your business that have the greatest strategic importance in helping you drive the business toward its stated goals? Without financial success—profits—businesses cease to exist. So balancing materiality and strategic imperatives is necessary if we want to move toward a fully sustainable future.

Better yet, at the nexus of these two concepts lies the ultimate in holistic value creation: innovations that allow you to reduce harm and increase value across multiple forms of capital simultaneously.

For example, we recently advised a prospective client on how they could adapt their recruiting brand and experience to more accurately identify candidates, diversify their hiring pool, and improve employee retention. That program was projected to generate a 30x financial ROI simply by reducing recruiting and turnover costs. However, it was also designed to greatly improve the candidate experience whether one was hired or not, thereby increasing the company’s Social Capital, creating a self-perpetuating cycle of positive candidate feedback and referral, and ultimately improved candidate and new hire quality over time.

That’s a great example of how an investment in Social Capital can act as a catalyst for both short-term and long-term business performance.

Not only do these unicorns exist, but they are often in plain sight. And they offer businesses that harness them a unique opportunity to differentiate themselves and establish a sustainable competitive advantage.

4. Own your sustainability narrative or someone else will.
ESG reporting has become a big business. Driven by the investing sector, a wide range of aggregators and specialists are requesting, collecting and reporting data back to the public, often in the form of proprietary scoring systems.

While we believe the net of these efforts is positive and helpful, on a company-by-company basis, the story raw data creates can be painfully inadequate and misleading. How can you know how the numbers you report will be used correctly? How can you be sure that your competitors are being equally transparent and forthcoming? How can you tell if the data will accurately reflect the scope and scale of your investment once they go into that proprietary black box?

The short answer is that you can’t. You need to own your own narrative.

Rather than try to respond to an endless stream of reporting requests, you should create a sound, sustainable vision for the future that aligns deeply with the core purpose of your organization. You should take ownership of your sustainability narrative by transparently communicating progress to the stakeholders who matter most to you.

That’s a lot more fun (and a lot more manageable) than the alternative.

5. Pursue progress, not perfection.
This is a sort of mantra for us. Nothing gets in the way of progress more than the specter of feeling like you have to do everything now. You don’t.

You need a long-term perspective and plan that aligns with who you are as a business, and you need to be working on truly material, inherently strategic issues that can move the needle.

But it’s not an all-or-nothing proposition.

Your stakeholders have increasingly high expectations, but they’re not unreasonable. In all likelihood, they’re looking for reasons to believe in you, to trust you, to follow your lead. Your role is to show them that you understand this new era of sustainable and responsible business and that you have a plan to lead your company into it. Set targets. Be transparent about your successes and failures in reaching them. Invite your stakeholders on the journey with you.

Don’t worry about being perfect. Just commit to making meaningful progress.

The evolution of sustainable and responsible capitalism will change the world. You can either be part of that movement, or you can risk being left behind. Sustainable, responsible brands will soon be the new norm. Why not get out in front of that wave and ride it for all its worth? 

Need some help getting started?

• Look at the competition: what are the best of the best in your industry doing to pursue sustainability and engage with their employees and communities?
• Ask your employees: they will know details that you may not and can help you identify areas of possible risk or weakness for immediate evaluation.
• Take the first step: focus on something obvious and manageable and start learning what it takes by starting the journey in earnest.