ESG – Just Another Acronym or the Key to Doing Good Business?

My last blog focused on CSR (Corporate Social Responsibility), the precursor to Environmental, Social & Governance (ESG) that is prevalent in company operations these days. I know what you’re thinking: “Isn’t is enough that I make a high-quality product that people want to buy?”  Not in today’s environment.

While many viewed CSR as simply “philanthropy,” it has become clear that throwing money at problems (while often still creating them) is not productive. Philanthropy is good but it needs to run deeper; it needs to be part of the soul of the company. CSR needs a seat at the table; ESG – three little letters that have a huge impact on your company’s reputation – needs to be a part of your company’s mission and values.  In fact, investors nowadays make decisions based on your ESG commitment.

Let’s take a closer look. 

Environmental:
If you’re a polluter, you impact the community’s health or the world as a whole (think air quality/ozone, rising tides, droughts.) Just because your company doesn’t make something that pollutes or uses a lot of natural resources, doesn’t mean you get a pass on being a good environmental steward. 

Consider for a moment that you own a simple ice cream shop.  You use green energy in the store, offer paper cups made of recycled material, only offer utensils made with cornstarch.  Doing pretty good, right?  But what about the cows that produce the milk?  How are they treated?  What kind of transport is used to deliver your goods? And where do all your toppings come from (overseas?)  What environmental practices do they employ? “Okay, Patty, but I’m just making great ice cream – I can’t control my suppliers.” It’s not just your store – it’s the entire supply chain you need to take into consideration.   There are risks to your reputation beyond what you think may be in your control.

Social:
Back in the 90s, I worked for a major consulting firm that had a Human Capital Practice.  We advised companies on how to get listed on the infamous “Best Places to Work” lists. That list still exists but goes far beyond simply the benefits offered to employees.

The social component of ESG encompasses how you create value for all your stakeholders.  For employees, it’s more than benefits: training, safety measures, professional development and now especially, diversity, equity and inclusion (DEI.)
 

For the customer, it’s about the safety of the product.  A 2019 Harvard Business School paper looked at the costs of product recalls.  Johnson & Johnson recalled its Tylenol product in 1982 at a cost of $100 million.  More than the dollar amount though, is the hit to its reputation and the gap in the market that allowed competitors to swoop in. More recently, the Volkswagen diesel scandal cost the company $30 billion. Protests and boycotts can have the same effect.

For the community, they want to see that your financial and in-kind donations are aligned with your ESG goals – are you putting your money where your mouth is?   Does the company take a stand on human rights issues (fair trade, child labor, living wages) and do they contribute to those causes?

Governance:
Governance is more than how a company is operated; it is how the executives and board members control and direct the company. Is ESG part of their performance metrics?  Are they – and Board members – avoiding conflicts of interest?  Are they diverse? Is their pay/compensation tied to the satisfaction of their employees or customers? How transparent are they? For an example of poor governance, think of any company recently where the top-level was getting stock bonuses while they were imposing layoffs or pay freezes at the lower levels.  And, once again, think of the hit to the company’s reputation when that makes the news.

So how is all this measured?  There are organizations like the Global Reporting Initiative (GRI) that look at all aspects of ESG and grade the company on its performance.  They look at operations – how the company invests, how it manages risk, does it operate transparently and ethically?  Is ESG integrated into a company’s business planning? Is executive compensation tied to ESG goals?  But it also measures a company’s health and safety record, its water consumption and waste management.  A company’s GRI score can impact – positively or negatively – its reputation, investor confidence and, ultimately, its “license to operate.”

According to GRI, in 2019, nearly all (93%) of the world’s largest companies reported on their ESG performance.  With shareholders, investors, employees and potential employees keeping a close eye on these ESG factors as an indication of the company’s overall health and future viability, these three little letters have become more important than ever.

You may have thought “ABC” was the foundation for everything – now it’s ESG.