Better ESG = a healthier firm, and a healthier world

As stakeholder attitudes rapidly shift: employees, customers, and increasingly owners, ESG engagement principles have become an emerging priority. But ESG should also act as an operational guideline for sustainability-minded companies, closely aligned to wider corporate strategy and purpose. 

Global management consulting firm McKinsey recently conducted a post-pandemic study in the US, finding that 70% of employees said that their sense of purpose is largely defined by their work. They expect their employer to stand strong on social issues, and as such companies need to develop strategic opportunities for everyone to connect with its purpose and mission in personal and meaningful ways. This is a growing trend as research increasingly reveals that sustainable businesses are more attractive to Millennial and Gen Z generations. 

Younger generations play a big part in this sea-change in other ways. In 2019 The Economist reported “Young investors are driving the surge in interest: more than three-quarters of high-net-worth millennial and Generation Z investors have their assets reviewed for ESG impact.” (“American Sustainable Funds Outperform the Market,” March 1).

Regulator interest is also growing, as touched on in our previous blog about the Net Zero Asset Managers Initiative. The SEC’s forthcoming climate risk disclosures, if adopted, would require public companies to provide detailed reporting of their climate-related risks, emissions, and net-zero transition plans. The European Union has already implemented the Non-Financial Reporting Directive, requiring companies to report how they manage social and environmental challenges.

Indeed, shareholders are seen as the driving force for ESG adoption. They want to know what matters and see the metrics – namely how ESG activity will boost business outcomes. According to Rupert Younger, the founder of the Centre for Corporate Reputation at Oxford University, “They also want to see how senior-executive teams are aligned through their incentive systems to deliver purposeful activity”. Other relevant themes, Younger reports, are “how purpose informs capital allocation decisions, both financial and human capital” and “standardisation of reporting”.

Younger discussed all things ESG in podcast ‘Inside the Strategy Room,’ with Robin Nuttall, a leader in McKinsey’s ESG and regulatory strategy work. He continued, “We looked at companies on the NYSE and Nasdaq that had strong ESG records at the start of the pandemic, both when markets started to collapse and from March 23rd onward, when the markets began to recover. In both of those periods, companies with better ESG records outperformed those with low records”. Using ESG commitments as a vehicle to achieve corporate purpose works, and it’s extremely profitable. 

Why? Good relationships with regulators, mitigating risk, improved resource efficiency, attracting and retaining the best talent, and raising productivity all contribute to getting ahead in the capital markets.

And how can business leaders harness ESG, and have their efforts heard and acknowledged? Younger says “Investors want to understand why your purpose matters. You need to articulate how you can help to profitably solve a set of problems relating to people or the planet. Your ESG commitments then flow from that articulation.” Nutall adds, “make sure you are talking about something material that has value to your business”. He acknowledges that patience will be required, “ The notion of a road map is powerful. Investors don’t expect you to change your business overnight, especially if you have a strong legacy in fossil fuels or food products now perceived as less healthy. They want to see a trajectory to improvement”. 

Social pressure, media pressure, public pressure and political pressure on business leaders will drive standardised processes, metrics and regulations. Stay ahead of the curve. With SI Engage you can capture and transparently report how your company is achieving its own ESG commitments, and ultimate corporate purpose. You’ll see the rewards in accelerating growth, cost-reduction, increased effectiveness, attracting talent, and targeting the consumers of tomorrow, highlighting why ESG is more important now than ever.

Image credit to Vecteezy.com.

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