Organizational Governance

Meeting Stakeholder Demand for Non-Financial Value

The companies that take time to plan, implement and communicate their sustainability progress will be the best prepared to earn the most business value from this ongoing shift in stakeholder influence.

Brand Provided | By Jeff Gowdy | Published 1 year ago | About a 6 minute read

Image: RDNE Stock Project

Being a forward-looking organization when it comes to environmental, social and governance-related matters means considering the needs of a wide range of stakeholders. Investors, Boards of Directors, employees, customers, and other stakeholders now demand value creation that goes beyond mere financials to include other forms of value — including ethical consumption, transparency, authenticity and equality.

Pressure to achieve these broader values is becoming common and is best achieved by understanding the diverse and interconnected interests and expectations of the universe of stakeholders for a given company:

Investors

Across many public companies, shareholders are holding corporate leaders accountable for their ESG performance; and more and more investors are integrating sustainability into their decision-making criteria to ensure they are making sound decisions on where they allocate their capital. They also want to understand how an organization’s ESG initiatives complement and strengthen its overarching strategy, and clearly see how specific ESG initiatives support the business model. Ideally, this is done with the support of hard metrics — including ESG scores from third-party analyses — to demonstrate progress and return-on-investment.

Several investors include in their decision making, at least in part, the scores from leading third-party raters (e.g., MSCI Climate Action Indexes), which inform investors looking for companies who create sustainable value and have implemented net-zero business strategies. As part of their scoring criteria, the indexes gauge how a company manages climate risks, the intensity of its Scope 1-3 emissions, if a company’s goals have been approved by the Science Based Target initiative, and if it offers more sustainable products or services. Further, an ESG corporate rating from ISS Analytics can show investors their material ESG-related risks, opportunities and impact along the corporate value chain. Therefore, it is in the interest of the company to understand what datasets their investors consider to be important, and to work to improve those scores where relevant.

Boards

In its oversight role, the Board is responsible for ensuring that the company’s strategy is capitalizing on market opportunities and addressing long-term material risks. For a long time, some Boards viewed ESG as more of a bonus and less an essential component of their strategy. However, this has shifted for many Boards — who now recognize that effectively managing ESG issues is an exercise in risk management and opportunity identification.

Today, to prepare their Boards to effectively oversee ESG risk, companies need to make sure their Boards are aware of their entire value chain and understand how climate change, human rights, diversity or ethical business practices have the potential to cause material financial impacts. These impacts can be positive or negative; but to mitigate risks and maximize opportunities, Boards must be fluent in the risk and opportunity landscape of their company.

Forward-looking companies have at least one Board committee with clear competence and experience in ESG — one that understands how the company’s ESG scores are collected and rated, and how to share them with their numerous stakeholders. This approach shows investors, shareholders and customers that ESG factors are methodically considered to make informed decisions.

Employees

A company’s sustainability performance is now a key component for attracting and retaining employees today. According to a recent IBM study, 70 percent of employees find sustainability programs make employers more appealing and 80 percent want to help their company reach climate or ESG goals. The study also reported that workers who are satisfied with their company’s social impact are more likely to want to stay with their employer for more than five years. This is especially the case among Gen Z and Millennials — where a global survey found that two in five respondents have rejected a job or assignment because the company offering the position did not align with their values.

Companies that tie their corporate values to their sustainability goals that their employees and/or potential employees deem important will ultimately be more productive and have higher retention. One of the first companies to get this right was Patagonia — the outdoor-apparel retailer has been a world leader in sustainability for 50 years, priding itself on prioritizing employee wellbeing and sustainability over profits. The company has an average employee turnover rate of just 4 percent. Further, 91 percent of Patagonia employees say it is a great place to work, compared to 57 percent of employees at a typical US-based company.

Another company early to sustainability was GE. In 2005, the company launched a program called “Ecomagination" aimed at reducing its carbon footprint and developing energy-efficient products to help address climate change and promote sustainability. The company created deeper employee engagement and improved retention by allowing employees to be directly involved in the company’s sustainability efforts. This inspired employees to make a positive impact on the environment — making the company initiatives more successful.

Customers

ESG’s impact is increasingly being included in purchasing decisions, with consumers willing to pay more for more sustainable brands that align with their own value systems. Beyond cost, authenticity, equality and transparency are guiding people to make these decisions.

A recent survey found that sustainability promotes trust, particularly among younger generations. While both younger and older consumers care about brands’ competence, younger consumers’ trust in brands is much more strongly influenced by the brands’ positive intent. In fact, when Gen Z and Millennial customers believe a brand cares about its impact on people and the planet, they are 27 percent more likely to purchase it than older generations are — a clear measure of sustainability’s power to drive buying decisions in this group. This is an important statistic because the younger generations will soon have the highest percentage of purchasing power across the globe.

Today’s consumers are also increasingly choosing companies with circular business models that help them reduce waste — for example, through reuse-and-refill systems; take-back programs; or by helping customers share, donate or repurpose and recycle old products or materials into new ones — or otherwise help them shop more sustainably (for example, Amazon’s Climate Pledge Friendly program).

The companies that take the time to plan, implement and communicate their sustainability progress will be the best prepared to earn the most business value from this ongoing shift in stakeholder influence.