INSIGHT. 05/31/18

The Business Case for Embracing ESG & Communicating the Results

By Alex Wittner

In 1970, economist Milton Friedman famously claimed that there’s “only one social responsibility of business – to use its resources and engage in activities designed to increase its profits.” For many decades, the notion that social purpose and profit are fundamentally at odds consumed corporate America and Wall Street investors, but recent developments suggest the tide may be turning. In order to compete in today’s marketplace, an increasing number of companies and investors are embracing environmental, social and governance (ESG) issues – believing that social responsibility can actually drive shareholder value.

A growing body of evidence suggests that purpose-driven brands are more profitable – a phenomena dubbed the “Purpose Paradox” by Freya Williams, CEO, North America for Futerra, in her book Green Giants (page 109). For example, fully 88% of sources analyzed in a recent meta-analysis of ESG data showed that good sustainability practices resulted in better operational performance.

Investors are also recognizing that corporate social responsibility isn’t just a way for fast-growing companies to spend their money; it can be a way for them to earn it. In fact, in his 2018 letter to shareholders, BlackRock Chairman and CEO Larry Fink called for “a new model of corporate governance,” which recognizes that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” And it’s not just about corporate governance – the largest institutional investors are demanding more disclosure about companies’ environmental and social positions to inform their investments.

Given this pressure, it’s no surprise that corporate America is taking notice. To give just one example, Citigroup recently took a stance in the gun control debate by announcing new policies that require the bank’s retail clients to restrict the sale of firearms to those under 21 and stop selling bump stocks. Citi’s CEO Michael L. Corbat explained that, “Banks serve a societal purpose – we believe our investors want us to do this and be responsible corporate citizens.”

But other businesses have suffered for neglecting to weigh the collective repercussions of their actions. For example, BP lost half of its value in 2010 when an offshore drilling rig exploded, leaking 210 million gallons of oil into the Gulf of Mexico over the course of 87 days. BP’s stock price, which is currently valued at about two-thirds of what it was immediately before this disaster, has never fully recovered.

Harmful ESG practices don’t merely impact businesses that naturally pose higher risks to social and environmental causes (like oil companies), they influence public perception as well. Nowadays, consumers are no longer simply looking to buy products – they’re looking to buy into a cause. That’s why many modern shoppers refuse to purchase a product or service from a company whose behavior is detrimental to society and why shared beliefs are the most common driver of brand loyalty. For these companies and many more, corporate social responsibility has evolved from a PR issue to a risk management issue.

However, despite some nudging from Wall Street and some stellar examples on the issuer side, many companies have yet to integrate ESG practices into their corporate strategy and embrace purpose as one path to sustainable growth. But even for the 85% of S&P 500 Index companies that did publish sustainability reports in 2017, there is often a disconnect between what investors want to know about corporate ESG initiatives and what companies disclose. Typically, corporates prioritize growth, while investors focus on risk.

Businesses looking to enhance and communicate their commitment to ESG in a way that benefits both shareholders and society should evaluate: where they are, where they should be, how to get there, what the end result looks like and why this is necessary. This process will be different for every brand, but organizations that are just embarking on this critical journey must consider the following key steps.

  • Select a purpose: An effective cause platform is well-developed, meaningful and congruent to the brand. To select an umbrella initiative and pinpoint relevant focus areas, companies should conduct a market audit to identify what competitors are doing in the space and where a newcomer’s expertise might fill in the gaps, speak with board members to determine the best direction and ask employees where their passions and priorities lie. This clarity of concept will serve as a north star that guides not only a company’s ESG commitments but its brand’s mission as a whole.
  • Test the market: Once a business selects a mission that aligns with the needs and expectations of all stakeholders and refines its messaging accordingly, it should begin to test the waters by talking with NGO’s, government groups, employees and customers to make sure the vision won’t land with a thud in the marketplace. This process might include recruiting advisors, partners or investors and attending events alongside other companies in the ESG space like the Sustainable Brands conference, the BSR Conference, the Aspen Ideas Festival and the World Economic Forum’s annual meeting in Davos.
  • Integrate the concept: After an organization has buy-in from the right internal and external parties, it must weave its newfound purpose into its business model. Having a department devoted to ESG communications and initiatives often isn’t enough. As Williams notes, in order to drive disruptive innovation (and reap the financial benefits that come along with reputational success), sustainability must be built in to a company’s business model across divisions, not bolted on as an afterthought (Green Giants, page 135). Collaboration is key.
  • Share all progress: Establish a clear reporting process by laying out goals and benchmarks. Developing an integrated report that provides ESG performance metrics alongside financial ones is a good way to communicate success and upcoming priorities with investors, board members, employees and customers. Integrated annual reports have the opportunity to highlight the integral link between forward-looking business purpose and overall results. Since ESG disclosures are voluntary, companies can choose from different frameworks for reporting. Among the most widely accepted reporting methods are those laid out by the Global Reporting Initiative and the Sustainable Accounting Standards Board.
  • Launch the program: The objective of this stage is to make sure the company is recognized for its commitment to the chosen ESG cause by ensuring key audiences are aware of its programs, efforts and progress to date. This might include producing a launch event, developing a press release, securing print and broadcast media coverage, exploring relevant speaking and thought leadership opportunities, relaunching the corporate website and presenting the ESG strategy at investor conferences. While every brand will approach their ESG public relations campaign differently, in order to be successful, it must:
    • Employ consistent messaging. This should effectively communicate 1) What the cause is, 2) Why the cause matters and 3) How the company that’s committed to the cause is making a difference.
    • Determine how to reach the right audiences. For example, if the primary goal of the cause platform is to do good while attracting new customers, evaluate what news sources this group relies on, craft targeted stories that differentiate the company and its ESG program and pitch these narratives to the appropriate media outlets.
    • Communicate effectively with each key audience. For instance, the messaging for investors might focus on the projected financial benefits of the company’s ESG efforts while employee communications might emphasize how getting involved can make an impact. However, all of these communications should ladder up to the overarching messages above.
    • Maintain a dialogue. Develop relationships with journalists and have ongoing conversations with them about overall corporate progress as well as ESG-related news. This can be achieved by speaking with the media about relevant ESG topics and trends in the news, producing a steady drum beat of related content (like contributed articles and integrated reports) and participating in the broader conversation on social media and in other forums like events.
  • Build momentum: Once this framework is in place, companies should refine and expand the program. While it requires significant time and resources to accomplish this (and the process is never complete), the return on investment will likely make the effort worthwhile. Successful ESG programs have the ability to build a company’s reputation; strengthen credibility with stakeholders; improve employee morale, loyalty and motivation; reduce risk and — ultimately — drive profits.

The increasing conversations about ESG among investors, companies and consumers demonstrates these considerations are gaining momentum. All companies must understand how environmental, social and governance factors apply to their business and impact their bottom line. Only then can these businesses determine the best path to sustainable growth.


 

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