As ESG continues to be debated among parties with varying ideologies and interests, recent conversations with board members and c-suite business leaders indicate the way they think about ESG has shifted and matured, including their motivation for various actions.
ESG efforts are dynamic and reflect that leaders take actions for different reasons. All companies are driven by regulatory and legislative changes, stock exchange rules, as well as changing investor requirements. Additionally, ongoing customer pressure and competition for employees drives leaders’ motivation and actions around ESG. Some efforts are driven by values, purpose, and social responsibility, and others by business strategy. Research from MSCI and Sustainalytics suggests that, over time, ESG-focused companies generally have lower risk and higher earnings growth, higher active return and higher dividends than other companies.
With thanks to WTW’s Shai Ganu and Amy DeVylder Levanat, leadership motivations for ESG action generally fall into three often overlapping categories that reflect company philosophy, strategy and approach:
Leaders provide input and commentary on ESG and/or report on actions or measures that are included in company disclosures, executive compensation filings, or public ESG or sustainability reports. Leadership’s involvement is important for managing both downside regulatory and capital/customer risk as well as retaining investors, customers and employees.
Here, values-driven leaders play a strong role in ESG as they create a culture of sustainability through company mindset, behaviors and supporting programs. Examples of common actions include establishing environmental efforts through Net Zero-type commitments, green benefits such as car policies that promote electric vehicles, commuter allowance or volunteer days, and climate action and protections to support underserved communities. Additional actions may include connecting climate priorities when implementing remote and hybrid work policies, supply chain decisions, real estate strategy and business travel policies. Leaders also may promote social responsibility-driven ESG efforts to bolster the physical, emotional and financial safety of employees, such as paying employees fair and living wages; ensuring equitable career opportunities; and, providing access to affordable and quality health care, retirement plans, and inclusive benefits and leave policies (e.g., fertility assistance, adoption support, parental/caregiving leave and reshaped savings plans).
Here, ESG is integral to operations. Leaders connect governance protocols for environmental and social factors to board, leadership, manager and employee behaviors, actions, and processes. This includes setting and tracking reasonable ESG goals that are aligned with company industry and strategy, and creating accountability by aligning board, executive and employee remuneration with ESG goals. Actions also may include appropriate levels of physical asset protection and risk transfer through insurance and other means.
Regardless of which category or categories their ESG actions reflect, leaders benefit from considering a series of questions related to company goals:
Recent challenges to ESG demonstrate that the role of environmental, social, and governmental factors in business is maturing and this focus provides leaders across all levels of the organization with an opportunity to assert their role in defining and taking actions that align with their motivations.
A version of this article originally appeared on Forbes.com on September 6, 2022.
