what to say when making the case for ESG
published 4.26.19
Your investor relations and legal teams are getting pressed for it. Your talent expects it. And, your customers want YOU to solve the most urgent problems facing our world. An environmental, social and governance (ESG) strategy (often referred to as a sustainability strategy) is no longer a ‘nice to have’. It is a strategic necessity. With the pressure to talk the talk and walk the walk higher than ever before, here are four reasons (if you still need them) to develop an ESG strategy:
Company Values Can Make or Break Your Talent Pipeline
You are only as competitive as the people you retain and keeping people is getting more difficult. Recently, seventy-five percent of HR professionals, in the U.K. and U.S., reported an average employee turnover rate of up to 30 percent (Speakap). But, there is hope. According to Deloitte, diversity, work culture, flexibility, and pay are your talent’s (especially millennials and Gen Z) top priorities. These social issues are also foundational to any holistic ESG strategy. Prioritizing mentorship and upskilling, inclusive onboarding, equitable compensation, and diversity of senior leadership and boards will enhance your employee lifetime value. Corporate philanthropy or CSR, a well-known “S”, also contributes to retention. When employees donate and volunteer through their work, the turnover rate is 10 percent below average. Boom.
Your Clients and Customers Care A LOT
While adopting energy, water, or waste management systems is nice and is an ESG practice, it is marginal. Your customers, millennials most of all, are looking for way more than operational efficiencies that boost your bottom line. They want you to tackle those monster problems weighing on society (so think rampant inequities, limiting global temperature rise to 1.5 degrees Celsius, and radical transparency in your value chains) AND feel like decent humans when spending their money with you. This means innovative products that eliminate waste and don’t induce guilt at the point of disposal; inclusive services and communications that speak to everyone; and transparent labeling that is clear, simple and honest. These expectations are not just regulated to B2C, either. An increasing number of companies are adding ESG stipulations to their contracts, vendor agreements, and due diligence processes. If you are expecting to work with Patagonia anytime soon, I’d go ahead and get started on that B Corp assessment. How will you move from one-off practices to transformative change to meet your customers' expectations?
It is ALL financial now
Gone are the days of ‘non-financial risks’ to classify ESG issues. ESG investment now accounts for 1 in every 4 dollars invested, strengthening the business case for corporate sustainability (Ceres). Investors now expect companies to proactively integrate these same ESG criteria into key business practices and investment decisions. We know there is a slew of ESG issues, and depending on your industry, some may be of less interest (and less impactful). But, investors need you to know which ones matter. A recent study by Harvard Business Review found companies with high ESG ratings on financially material ESG issues outperform those with low ratings on the same issues (HBR). So, you better get cranking on that materiality assessment.
Moves by several groups like the Financial Stability Board, in creating the TCFD, showcase the impact climate-related issues have on the balance sheet, income statement, and cost of capital and it’s not good. For example, albeit scoring above the industry average by Sustainalytics (an ESG scorer and data provider), PG&E is now facing almost $30 billion in liabilities from wildfires. You don’t want this to be you. Sustainalytics’ old rating system ignored an important material factor, that now rates PG&E dead last (Flat World)! The point of this is to demonstrate the importance of identifying your company’s material ESG issues, disclosing them to all stakeholders (even investors), AND developing a plan to mitigate the risk associated with these issues.
At the end of the day, investors, lenders, and even consumers don’t want to give their money to those who aren’t accounting for all possible risks in today’s climate. Don’t miss out on a valuable business opportunity just because it seemed too hard or complex.
You will be left behind
There is no turning back. The ESG mindset of your employees, customers, and investors will only expand and become more prominent in everyday business decisions. Will you be a forward-looking company that leverages your ESG strategy to drive new market opportunities and foster innovative products and services? Or, will you lag behind industry peers maintaining a short-term perspective on the needs of the market and our society? Your business practices, from procurement to corporate development, have the power to create change. Join the historic movement changing the world with what we buy, use, and dispose of.
Your ESG strategy will deliver growth for your company. Now is an incredible opportunity to make a big difference. How will you get started?
This article also appeared on LinkedIn.
by Sam Hartsock
Cofounder
