No longer can a company focus solely on profits and ignore the damage it inflicts on its employees, its community, its environment and the planet at large.
But committing to ESG activities—environmental, social and governance—isn’t just good public relations; investors are looking for companies that integrate their missions throughout their operations, says Harvard Business School’s George Serafeim.
“Companies are likely to be more resilient in the face of unexpected shocks and hardships if they are managed for the long term and in line with societal megatrends, such as inclusion and climate change,” Serafeim writes in the September/October issue of Harvard Business Review.
The COVID-19 pandemic, as well as the Black Lives Matter movement have increased pressure on companies to improve their ESG performance, he says.
Read more at Social-Impact Efforts That Create Real Value
PRI, the United Nations-backed responsible investment organization, encourages investors to “use responsible investment to enhance returns and better manager risks.” With more than 3,000 signatories, the group has identified key issues in ESG:
- Environmental—Sustainable land use, plastics, water, biodiversity, fracking and methane.
- Social—Human rights and labor standards, employee relations and conflict zones.
- Governance—Tax avoidance, executive pay, corruption, director nominations and cyber security.
The website offers publications, webinars, events and more to discuss ways companies can take action in these areas.
Read more on the PRI Environmental, social and governance issues page.
ESG policies create benefits for companies
The global financial firm BBVA believes ESG strategies are vital, even during crises such as the pandemic, civil unrest and economic problems that challenged everyone during 2020.
“In essence, adhering to an ESG framework means you are future-proofing your business, and those that made this a priority in the years prior to 2020 are also those that have had more tools to deal with the pandemic’s varied impacts,” writes Javier Rodriguez Soler, BBVA USA president and CEO.
Read more at The importance of ESG in 2020
Marsh & McLennan, a professional services firm, looks at the relationship between ESG and employees’ attitudes toward a company. A strong ESG performance is a competitive advantage in attracting talent, the company finds. In addition, millennials and members of Generation Z (those born just before and since the year 2000) value environmental and social justice more than older generations do—and they will be 72% of the world’s workforce in 2029, compared with 52% in 2019. They will expect their employers to be committed to those issues as well.
Read more at ESG as a Workforce Strategy
Communicating your company’s ESG activities
Many people think only of the environment or climate change at the mention of ESG. We’ve already looked at some other elements of ESG—including board diversity, executive pay and business ethics—but PwC says stakeholders differ on what the term means, how to manage ESG and how to communicate about it.
A company’s board of directors sets the tone for how a company regards ESG.
“Leading companies view ESG issues as a business imperative. They manage risks while capitalizing on opportunities…Laggards still think of ESG as a check-the-box exercise grounded in philanthropic activities,” PwC notes.
Investors, though, want to see the company’s long-term plan with standardized data so they can assess the risks involved. Yet, corporate executives don’t understand what information investors want or in what format they want it.
“More and more institutional investors are looking for a company’s management to articulate a sustainable long-term value creation strategy that outlines not just growth opportunities, but also the related risks. They view ESG matters as critical to understanding the full risk profile of a company and how prepared it is for the future,” PwC reports in its paper, Mind the gap: the continued divide between investors and corporates on ESG
Although a standard framework—comparable to a 10Q quarterly report to the Securities and Exchange Commission—to report companies’ ESG activities has not yet been established, but frameworks are available.
CEO Investor Forum offers a paper and a webinar focused on how companies can use quarterly earnings calls to update investors on their ESG strategies. Brian Tomlinson, director of research for Chief Executives for Corporate Purpose, says in a webinar that the lack of standardization regarding ESG can lead to misunderstandings or faulty comparisons between companies.
But he also has a suggestion to squeeze those ESG results into what often is an information-packed event.
“If a company wants to talk about the issue in its earnings call, use the theater of the earnings call,” Tomlinson says. “Prime one of those leading analysts to ask the question.”