Environmental, social and governance (ESG) has shifted from a niche focus of impact investors to a mainstream topic across multiple stakeholders due to its potential to influence business performance, risk and value creation. It also has become a source of debate among parties with varying ideologies and interests.
Recent conversations with C-suite business leaders indicate their role in ESG also has shifted, increasingly shaped by three often overlapping categories of action that reflect company philosophy, strategy and approach:
ESG efforts are dynamic and reflect that leaders take actions for different reasons. Social-responsibility-driven companies also make compliance-driven decisions. Strategy-driven companies can be socially responsible. Some companies are on a journey to evolve across the three categories over time; others are satisfied with where they are and target actions primarily in one category for the foreseeable future.
All companies are driven by regulatory and legislative changes and stock exchange rules as well as changing investor requirements. Additionally, ongoing customer pressure and competition for employees drives leaders’ use of ESG actions.
Examples of stakeholder influence include:
Research from MSCI and Sustainalytics shows that, over time, ESG-focused companies generally have lower risk and higher earnings growth, higher active return and higher dividends than other companies. These factors help explain why WTW’s ESG Survey of Board Members and Senior Executives shows 78% of board members agree that strong ESG performance is a key contributor to creating organizational value and stronger financial performance, varying by industry, geography and company strategy.
Leaders’ roles vary across the three ESG categories in terms of actions and priorities.
In this category, leadership’s role is highly risk-focused and centers on managing and reporting on specific ESG elements such as:
Leadership’s role in the governance dimension is focused generally on providing input and commentary on ESG and/or reporting on other 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.
In this category, leadership’s role expands considerably as ESG is connected to purpose that is aligned with multiple stakeholders. Leaders play a strong role in ESG as they create a culture of sustainability through company mindset, values, 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 allowances 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 promote social-responsibility-driven ESG efforts to bolster the physical, emotional and financial safety of employees. For example, they may take specific actions such as paying employees fair and living wages and ensuring equitable career opportunities. They provide inclusive benefits and leave policies (e.g., fertility assistance, adoption support, parental/caregiving leave and reshaped savings plans).
Also important is ensuring employees have access to quality and affordable health care; implementing minimum standards of care for all employees; focusing on broader social determinants of health such as access to transportation, food insecurities and safe drinking water; and helping employees and their families achieve retirement security.
Additionally, leaders continually listen to employees, maintain a strong commitment to wellbeing and DEI and foster sound governance practices. In essence, they operationalize their ESG programs through company actions and behaviors related to measurement, investment decisions, executive and board remuneration, directors’ and officers’ insurance, ethical conduct and a healthy company culture.
In this category, leadership’s role and impact are integrated into company strategy to drive specific and quantified business opportunities where links between ESG and business performance, risk management and value creation are well defined and measured. Here ESG goes far beyond programs and mindset and is integral to operations. Strategy-driven ESG is a value creator and risk mitigator that enables the company to thrive today and in the future.
Leaders’ roles may build on actions from the first two categories with other activities that vary by industry. In some industries, environmental commitments are reflected in company strategy through climate transition strategies such as moving from fossil fuel 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.
Leaders integrate governance protocols for environmental and social factors into 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 where their ESG actions align, leaders benefit from asking a series of questions related to company goals:
Recently, ESG has been under scrutiny by some stakeholders, with challenges that question its benefit to investors and society overall. These challenges demonstrate the rise of ESG as a core business focus as well as the opportunity for leaders across all levels of the organization to assert their role in driving business impact (regardless of category) and creating a sustainable future for their stakeholders.