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Set Up ESG Programs to Drive Growth, Not Just Compliance

Recent studies underscore the business performance value of strategic ESG programs.

Ever since the topic of environmental, social, and governance (ESG) disclosures began making headlines, executives, investors, and analysts have been debating the question of whether or not ESG drives value or profitability for companies. Unfortunately, the increasingly politicized discourse around ESG today frequently misses the true intent of ESG, namely, to reduce and manage risks while surfacing opportunities to create value and drive business growth. While the Securities and Exchange Commission (SEC) and major institutional investors, such as BlackRock, are largely interested in seeing companies identify impacts of business on environment and people, and vice versa, to further these risk mitigation and opportunity-related intentions, naysayers tend to get caught up in the many challenges inherent in quantifying the business impacts or financial results related to sustainability measures. Or they point to the lack of standardized reporting for meaningful comparison purposes.

The upcoming SEC rules and International Sustainability Standards Board (ISSB) reporting framework will help remedy the major pain points. In the meantime, recent studies bring new insights to the dialogue, scoring points in favor of ESG:

  • A recent Bain & Co. research brief[1] points out that, “ESG activities have no strong negative correlations with financial outcomes; in fact, they are associated with encouraging revenue growth and EBITDA margins. Our findings indicate that positive ESG outcomes are a trait of successful companies and that sustainability measures correlate with better financial performance.”
  • IBM Institute for Business Value[2] seconds the notion, sharing in its research insights that, “When ESG is viewed as a vehicle for driving business value—rather than a narrow reporting exercise—ESG generates insights that create opportunities and boost performance.”

Attitude is everything

Ultimately, the decision of whether or not to disclose ESG policies and performance will soon be out of executives’ hands as new regulations take effect, requiring many corporate leaders to look seriously at these issues and embark on an ESG reporting exercises for the first time. As executives and boards think through how to meet the new requirements, it is the mindset they adopt that will make all the difference.

While some companies will approach the task as a chore, those that take a strategic approach to ESG will glean much greater value from their efforts. Embracing the opportunity to go beyond risk mitigation and pursue the added potential benefits of ESG—transforming stakeholder interactions, increasing customer satisfaction, improving efficiency, reducing costs, modernizing processes, and/or strengthening brand and reputation, for example—will influence corporate approach as well as results.  Indeed, viewing ESG as an enabler of business growth as opposed to a compliance requirement opens the door to the strategic thinking, cross functional collaboration, and organization-wide support necessary for ESG initiatives to contribute significantly to the organization’s next phase of success.

Approach ESG with business growth in mind

Companies with the right ESG attitude will need a game plan to finetune strategy and put it into action. The following steps can help organizations realize the full potential advantage of their ESG activities:

  1. Know what matters most

Companies don’t need to have a program for every single ESG topic, as many issues are not material or relevant to the company and industry. Instead, concentrating on stakeholders’ top ESG priorities allows leaders to focus internal initiatives, external communications, and strategic planning on the areas that will drive employee engagement, customer satisfaction, shareholder approval, and supplier endorsement—some of the most valuable outcomes of ESG.

One of the most effective ways to define the most relevant stakeholder ESG priorities is to conduct a materiality assessment. These surveys give companies a clear understanding of what matters to the key groups of people who ultimately make or break the success of the business. Often, such exercises turn up insights that a company may otherwise overlook.

For instance, a software company probably anticipates that data privacy and security will rise high on the list of ESG priorities. But a materiality assessment may reveal other highly important stakeholder issues, such as the need for a robust whistleblower program. Without proactively gathering this information, the company could easily deprioritize the development of such a program, thus raising stakeholder concerns regarding business ethics practices while potentially damaging company reputation and diminishing trust.

  1. Connect ESG to strategy and vice versa

With stakeholder ESG priorities clearly defined, the next step is to fully integrate those priorities into the business and articulate the company’s unique vision of ESG. In particular, this effort should explore the ways in which ESG priorities are aligned with the company’s strategic planning process as well as the relationship between ESG programs and desired business outcomes, including bottom line results.

At this point, it’s critical to recognize that ESG priorities and financial growth are by no means mutually exclusive. Companies that get the mindset right will develop the capability to combine both lenses as they make strategic business decisions.

Building on the software company example above, it would be wise for the company’s leaders to examine the importance of integrity in its business practices, explore the impact that whistleblower policies have on business ethics, and articulate the ways in which the company’s efforts reduce risk and improve the dependability of their products for consumers. Considering these issues can lead to outcomes that improve customer satisfaction and grow the marketability of the brand in addition to reducing the risk of litigation or regulatory intervention.

Business leaders that get into the habit of regularly revisiting and reassessing the relationship between ESG focuses and existing strategic priorities will, over time, more easily see the ways in which so-called non-financial initiatives can help drive financial outcomes. At most corners and crossroads, business leaders already ask themselves a few key questions, like “How will this impact our customer?” or “Does this drive shareholder value?” If they can add a few other simple questions to their repertoire, such as “How will this reduce our physical impact?” or “What will this mean for employee engagement?” leaders can effectively make more ESG-informed decisions that benefit both the bottom line and the sustainability of business.

  1. Implement ESG programs that drive growth

While poor or misaligned ESG initiatives represent a business expense, those that are well informed and well executed are investments in growth and profitability. In most cases, the difference between a poor program (that drives up costs) and a good program (that drives up profits) are relevance to stakeholders and integration with the business’ strategic priorities.

Assuming an organization has done the work to identify stakeholder ESG priorities and align them with overall business goals, then the groundwork is laid for creating genuine paths for ESG progress and meaningful results. By giving the necessary attention to the most relevant issues and leveraging existing corporate strengths, virtually any ESG effort can drive better business performance.

For example:

  • Better human capital development reduces employee attrition and hiring costs.
  • Better data security reduces litigation costs.
  • Better energy efficiency reduces utility costs.
  • Better supplier management can improve inventory availability and grow sales.
  • Enhanced environmental practices can improve ROI on marketing and sales efforts with consumers.

And the list goes on. Making these connections and following up with thoughtful communications and clear statements about the strategic intent, reach, and limits of these types of initiatives will ensure better stakeholder understanding and appreciation of a company’s ESG vision. In addition to delivering disclosures and data that will meet regulatory requirements, companies will be delivering a clear message to stakeholders that ESG is clearly integrated into many aspects of the growth story.

Raise the bar for ESG

Companies looking at ESG primarily as a regulatory obligation or as a way to reduce compliance risk are overlooking opportunities to drive the greatest value for all stakeholders. It’s well worth the time to ensure ESG activities align with stakeholder priorities and the organization’s strategic and financial goals. The extra effort will lead to the execution of high-impact initiatives with results everyone will value.

Need help getting into the right ESG frame of mind?

From conducting a materially assessment, to integrating ESG priorities into strategic planning, to implementing the right programs, Riveron can help turn ESG into the growth enabler it has the potential to be: Learn more.

[1] https://www.bain.com/insights/do-esg-efforts-create-value/

[2] https://www.ibm.com/downloads/cas/R6RO7REX

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