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Why all ESG is not the same

By John M. Bremen | September 20, 2022

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.
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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:

  • Compliance-driven ESG actions primarily are focused on satisfying compliance requirements, regulators, exchange rules and/or basic investor or consumer expectations, regardless of ideologies related to ESG. Actions reflect managing and reporting on specific elements such as climate, DEI, safety and wellbeing, development, and governance protocols.
  • 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.

  • Social responsibility-driven ESG actions are based on values and company purpose, with leaders believing that ESG is good for business, and that the company generally benefits from alignment with multiple stakeholders who proactively invest in, purchase from, and work at companies whose values are consistent with theirs. Effective leaders also take care to acknowledge that not all stakeholders believe in ESG or some of its components.
  • 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).

  • Strategy-driven ESG actions are integrated into company strategy and operations in sectors where ESG drives specific and quantified business opportunities. In this category, leaders drive actions where links between ESG and business performance, risk management and value-creation are well-defined and measured. Such strategies vary considerably by industry. In some cases, environmental commitments are reflected in company strategy through climate transition strategies, such as moving from fossil fuel usage to alternative fuels, business model shifts such as moving into production of carbon-reducing products and services, or operational changes such as mitigating against extreme climate events. In other industries, they may include shifts in raw material or supply chain strategies, such as using sustainable products and services, operational shifts or ESG-focused products and services.
  • 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:

  • To what extent is our leadership team clear on our motivation for ESG commitments and action?
  • How can our leadership team members be more aligned with each other when it comes to ESG?
  • How can our leadership team clearly communicate about ESG with our board, employees, investors and customers?
  • To what extent are our company incentives aligned to drive the outcomes we want?
  • How fair and equitable are our pay, career and benefits programs, and how do they align with our ESG commitments and goals?
  • How do we monitor and measure our exposure to ESG-related operational costs/risks (e.g., supply chain disruption) and people costs/risks (e.g., climate impact on operations as well as employee health and cost of healthcare), and the actions we must undertake to mitigate such risks?
  • To what extent are our company decision-making and governance processes aligned to drive the outcomes we want?

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.

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Managing Director and Chief Innovation & Acceleration Officer

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