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
Consumers increasingly savvy about sustainability claims
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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.
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Published Nov 20, 2023 2pm EST / 11am PST / 7pm GMT / 8pm CET