THE WORLD TODAY
Debate around topics like climate change, employee wages, and board diversity are rapidly rising in importance across the world. Society is trending towards driving accountability across these issues, which are commonly bucketed together with the term ESG.
ESG (environmental, social, and governance) started off as a financial community term to characterize the factors around responsible and sustainable investments. It is related to sustainability, a more commonly used term within companies, and refers broadly to doing good and creating long-term value. Each component of ESG has been around for decades, but their developing ability to strongly influence how organizations and people act across the mainstream is new.
ESG IS IMPORTANT AND RAPIDLY EVOLVING
Organizations that do well in ESG factors have more business success, especially in the long term. A study that combined the findings of 2,200 individual studies observed that there is a positive ESG impact on corporate financial performance, which remains stable over time.
INVESTING IN ESG
ESG investing acts as a “proxy for how markets and societies are changing” and it affects the valuation and success of businesses. If properly measured, which is a major challenge today, then it is intuitive to invest in organizations that reflect what society values and is willing to invest in most.
SUSTAINABILITY AS SUPERLAW
Following on the above belief, an increasing amount of pressure is being applied to organizations to take their ESG issues seriously. A business can be pressured by any stakeholder, including its customers, vendors, NGOs, financial institutions, governments, and the public at large. The European Union is leading the way on the policy side regarding ESG. Even when there is less legal pressure, like in the United States, societal pressure can lead to sustainability as superlaw. The superlaw effect is where companies self-impose a standard upon themselves, often publicly.
Despite rising pressure from all parts of society, the ESG space is still nascent. Today there is no concrete framework followed by a majority of the community, and ESG indices tend to be based on defective data and non-intuitive methodologies. It is unexplored territory for the most part, and successful best practices are still developing for all stakeholders.
Even with its lack of uniformity, the ESG space has continued to see exponential growth in its importance. A recent investor letter by Larry Fink, CEO of BlackRock, demonstrates how one of the world’s leading financial institutions views ESG as crucial, even if its actions are limited at this point in time. The BlackRock letter also puts the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD) at the forefront of groups providing frameworks for companies to follow.
While we are still in the early days of frameworks and adoption, there are best practices that any organization can act on to be successful across its ESG issues.
ORCHESTRATING SUCCESS
The vast majority of companies today have not operationalized effectively around ESG issues. Some may have a Sustainability or Corporate Social Responsibility function, but they likely lack structure, strong cross-functional collaboration, and funding relative to other departments. The main goal may be to produce a lengthy annual report that has little impact on operational activities. If this sounds familiar to you, don’t worry, you’re not alone.
To help your organization orchestrate success, here are 5 action steps to get ahead of the ESG movement:
- Generate buy-in and alignment from the Board of Directors, CEO, and the rest of the Executive Team regarding the importance of ESG issues and priority.
- Set up a cross-functional group of key stakeholders, who will work together on managing ESG issues.
- In your working team, include key executives (e.g. General Counsel, Board Secretary), Investor Relations, Legal, Compliance, Marketing, Sustainability, External Affairs, Government Affairs, and Regulatory Affairs.
- Assign a project owner role to whoever will be ultimately responsible for the success of your organization’s ESG efforts.
- Empower that project owner with authority to manage a full budget and team.
- Define your specific goals and metrics around ESG. Look at best practices in your industry and the frameworks that financial institutions will be judging you by.
- Set up systems to track, measure, and monitor your progress.
- Hold people accountable to their progress by attaching ESG outcomes to their core job function and incentive structure.
ESG IS HERE TO STAY
You might be asking yourself, is this really worth all the effort? ESG is important today, but how can we be sure that this isn’t a temporary trend? What happens in the case of a market correction or a downturn?
Some aspects of culture and prioritization will change over time, but what society fundamentally cares about and how it feels around ESG is unlikely to change. Regardless of the state of the economy, the society will continue to ramp up in its care for ESG factors and how companies are doing around them. Climate change will remain an existential threat. Social factors will not go away. Strong governance will become more important when there is less room for error.
Even in the off chance that investors and governments decide to stop progressing, doing well in ESG factors still leads to a more sustainable and successful business.
ESG is rapidly changing how businesses need to operate to be successful. Organizational change as we all know takes significant time, effort, and resources. The world will not wait for businesses to change at their own pace. Businesses will be better off matching the pace of the change happening in the world. It’s an ESG world, and we’re all living in it.
