ESG - The New Normal of Business
ESG. Stakeholder capitalism. Stakeholder value creation. Mission-driven. Corporate purpose. Corporate impact. Woke funds. Sustainability, social responsibility, corporate responsibility. What’s the difference? And does it matter?
These days it’s tough to look at any mainstream business publication, or news outlet for that matter, and miss headlines like “managing your money the woke way” “new capitalism,” and “businesses must act on a new corporate purpose.” What these headlines refer to isn’t so much some new radical business philosophy, rather they demonstrate the recognition that the world has changed (and is constantly changing) and businesses need to evolve with these changes to stay relevant and viable.
The events of 2020 - the COVID-19 pandemic, mass unemployment, a global reckoning on systemic racism, and historic wildfires in the western United States - certainly raised public expectations on corporate America for addressing environmental and social issues.
These events also demonstrated how inextricably linked corporate and societal welfare actually is. Stranded assets from supply chain disruptions, manufacturing shutdowns from labor shortages, and spoiled food that never made it to market are real examples in 2020 of how interconnected we truly are and how devastating these reverberations can be across society.
Now in 2021, we hear a lot about the ‘new normal of business,’ the great ‘reset,’ and the organizations of the future. We also hear a lot about climate change being the greatest existential threat to our global economy, racism being a public health emergency, and the rising expectations on corporations to address these issues by the global investment community.
So how are companies supposed to respond to these rising pressures? And what do we call the response? Whether you’re calling it ESG, stakeholder capitalism, purpose-driven business, or some combination of the three, remember one thing.
What you call it doesn’t matter. What you do with it does.
Same Concept, Different Language
Remember that famous saying, ‘some say tomato, some say tomahto?” The same goes for how we discuss this new normal of business.
The name-game aside, there are two critical concepts you need to know as a corporate leader facing these expectations:
ESG is simply recognizing and managing the business risks and opportunities from changing economic, environmental, and social conditions
All companies have stakeholders - employees, customers, investors, suppliers, local communities, NGO’s and government - that’s actions can impact the company and vice versa
So when you combine these two concepts, what do you have?
You have a clear understanding of what all these headlines, names, and commentary are trying to convey; changes to economic, environmental, and social conditions require businesses to respond and adapt in collaboration with the stakeholders that directly affect the business’s ability to operate. The result? Your business creates value for your stakeholders, and your stakeholders create value for your business.
Let’s dive deeper into how this looks for a range of company sizes and structures.
Publicly-Traded Corporations
With the recent SEC disclosure regulations and BlackRock CEO Larry Fink’s 2021 Letter on climate risk and human capital management, the regulatory and investment community have recognized the systemic financial risks from these environmental and social issues. Public companies will need to report on their material risks and opportunities, their associated goals and efforts to manage them, and their performance using recognized ESG disclosure standards like the Sustainable Accounting Standards Boards (SASB) and the Task Force for Climate-related Financial Disclosures (TCFD).
From risk reduction to customer acquisition to product innovation, ESG-centric companies have demonstrated an explicit competitive advantage. In fact, a 10-year study by the Financial Times demonstrated that ESG-centric funds outperformed the wider market each year.
How can this be you ask? When we recognize ESG issues - like rising natural resource scarcity and wealth disparities - as deeply intertwined with all other business issues, we can then recognize business issues as deeply intertwined with the broader health of our planet and our communities. The result? We have more complete views of the broader system, and are then able to make better financial decisions.
This concept isn’t only applicable to large, public, multinational corporations. Let’s break down the relevance of ESG for private companies and start-ups.
Privately Owned Companies & Private Equity
As more brand name companies set long-term emissions goals, scope 3 emissions, or the emissions along corporate supply chains, has rapidly become a source of differentiation in the battle for brand name enterprise customers. SalesForces’s recent announcement on requiring suppliers to set carbon goals is one of the more high profile examples of increasing ESG due diligence and performance requirements for suppliers in the RFP process. With 80-90% of a company’s adverse environmental and social impacts happening across their supply chains, a private company’s ability to support an enterprise customer’s ESG performance has rapidly become the greatest competitive advantage in the new normal of business.
On the private equity side of the house, 88% of private equity investors surveyed by Bloomberg in 2020 said they use ESG performance indicators in making investment decisions, following the shifts in consumer buying preferences regarding solely supporting companies with sustainable business models and practices.
Beyond ESG-centric private companies dominating RFP processes for public customers facing their own ESG pressures, those aspiring to an IPO benefit from higher valuations, risk-reward assessments, and better capital and loan terms.
Regardless of a company being private or public, the overwhelming majority of stakeholders are voting with their wallets, and their client’s wallets, for more sustainable, socially conscious, and well governed companies.
Start Ups & Venture Capital
Although startups and venture capital haven’t received as much attention in public discourse regarding ESG, the same risk management and value creation benefits apply.
Just consider the governance woes of WeWork, or the workers rights and customer safety controversies surrounding Uber, and one can quickly see that a company’s environmental, social, and governance practices are actually critical to enterprise risk management and intrinsic value. Inexperienced founder tweets, social media tirades from pissed off customers, and one bad move from a critical supplier can instantly tarnish a brand and its stakeholder support overnight. By incorporating and formalizing the company’s approach to ESG early on, the positive impact compounds as the company scales and matures. Assessing the ESG issues most relevant to your industry, your business, your growth model, and your critical stakeholders early on provides insight into the long-term risks and opportunities for value creation and longevity.
The New Normal of Business, For All Businesses
Whether you’re a multi-national with operations around the world or a start-up founder beginning to scale, ESG is a pathway for aligning your business with the realities of changing external conditions and stakeholder expectations. By understanding and leveraging this dynamic interconnectedness between your organization and its stakeholders, your ESG performance will become the source of your longevity, innovation, and competitive advantage.
Calibrate Partners
We partner with organizations of every size, mission, and industry to develop and execute ESG strategies that drive profitability and impact. Our unique approach ensures alignment between your internal culture, your critical stakeholders, and the external conditions impacting your business landscape. Contact us to learn more about how we can support your company’s leadership, culture, and strategy to make ESG performance your competitive advantage and the driver of your long-term success.
