ESG has been important to companies and to investors, though recently there has been some blowback from certain segments of the market on whether it is a feel-good, hard to measure, share-holder unfriendly and fuzzy goal. This piece proposes that while it remains important, a new ESG which is far more focused and therefore measurable, far more aligned with stakeholder value and far more resonant with recent challenges needs to be acknowledged.
What is traditional ESG? Here is a comprehensive definition from ADEC:
Environmental risks created by business activities have actual or potential negative impact on air, land, water, ecosystem, and human health. Company environmental activities considered ESG factors include managing resources and preventing pollution, reducing emissions and climate impact, and executing environmental reporting or disclosure. Environmental positive outcomes include avoiding or minimizing environmental liabilities, lowering costs and increasing profitability through energy and other efficiencies, and reducing regulatory, litigation and reputational risk.
Social risks refer to the impact that companies can have on society. They are addressed by company social activities such as promoting health and safety, encouraging labor-management relations, protecting human rights and focusing on product integrity. Social positive outcomes include increasing productivity and morale, reducing turnover and absenteeism and improving brand loyalty.
Governancerisks concern the way companies are run. They address areas such as corporate brand independence and diversity, corporate risk management and excessive executive compensation through company governance activities such as increasing diversity and accountability of the board, protecting shareholders and their rights, and reporting and disclosing information. Governance positive outcomes include aligning interests of share owners and management and avoiding unpleasant financial surprises.
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ESG is and will continue to be important but it covers so many areas that it often feels unfocused and is often something that has a section in an Annual report and a check box that must be marked. Though essential to a healthy business it is seen as a "nice to do" or a "we have to do" versus being the competitive advantage that will drive increased customer loyalty, enhanced attraction and retention of talent and increased financial value to owners and shareholders.
Today amidst the triple crisis of health, economic and social unrest reflected in COVID-19, generational shifts and Black Lives Matter, a more clarified and focused ESG should be Employees, Society, Government.
Every smart company understands that purpose, values and doing good needs a focus on ensuring that their employees are well taken care of, the impact of their products and services is a net positive to society and that they work in harmony with government, which is an essential force holding society together and providing resources to its employees.
Employees: Is the company ensuring security for their employees by paying a wage that allows them to have disposable income after they cover living, health and student debt? Are you providing adequate health care and an environment that does not put their physical or mental health at risk? Does the firm have diversity across the company and do people feel safe in speaking up? Are they investing in training? Most importantly are employees a cost or also an asset?
The most critical asset a company really has is its workforce. My four decades of experience and years of research for my book Restoring the Soul of Business: Staying Human in the Age of Data indicate that it is employees who create the brands, the ideas and the experience that make a company … and the only way a company improves and transforms itself is by growing the skills and unleashing the talents of its people.
Today employees are more stressed than ever and over the next few years companies will be made or broken based on what they do and did in the early 2020s. The Great Resignation and "Quiet Quitting" are symptoms of the real questions: why, how, where and who we work for?
Society: We have always lived in a connected world, but over the past few years we are more connected than ever due to search that allows us to connect to information, e-commerce that enables us to connect anywhere to transact, social networks that connect us to each other and mobile phones that connect us all the time. No wonder that the key connecting companies of Google, Amazon, Meta and Apple are four of the most valuable companies in the world.
While many of these were funded by advertising and ran AOS (Advertising Operating Systems) or iOS (Apple) the reality is they are now Society Operating Systems and must manage themselves and be governed as such. But increasingly due to their scale, scope and balance sheets more and more companies from Walmart to CVS to Starwood’s decisions change society. What are the implications on society of a firm’s business decisions? Often the secondary effects of optimizing for business creates huge problems for society.
How can a company understand both what the ill effects might be to society but as importantly what good can one do for society? (Walmart unleashes its logistics often after a hurricane.) Society is often the community that companies are based in, or their employees live in, and where their customers make their life. Every company has the potential to be a net good to society while also ensuring profitability and growth, but it needs to be baked into its strategy.
A focus on purposeful good for society and multiple stake holders attracts not just customers but talent who feel more connected and prouder of such firms.
Government: If there is one thing that COVID-19 and its aftereffects have shown is that government matters. The quality of governance matters. Even the University of Chicago professors worry that government has been captured by business and wonders how to save Capitalism from the Capitalists. Government has been underfunded, demonized and lobotomized via lobbying and a platoon of politicians who believe they are in the business of entertaining versus running things and solving problems. More government may not be the answer, but better government and a more respected government is usually key for a country’s health.
Businesses must recognize that earning billions and paying peanuts in taxes eventually means no infrastructure, no public schools and much more. Running to government when things get tough but starving them when things go well is not aligned with purpose values and other high thoughts that gallivant and roam free on corporate websites.
So, every corporate leader, HR honcho, purpose-driven person in a firm should ask, "Are we looking after our employees?" "Are we thinking about society -- particularly the negative impact of our products and services?" "Are we helping government, including paying taxes?"
The Employee, Society, Government focus will need to be done first to truly realize Environment, Social and Governance goals.
Today more and more customers care a lot about how companies are looking after their employees and caring for society. If one is a senior manager, it is important to spend some time with employees in their 20s and 30s and learn how they truly care about purpose, values and fairness. This impacts their decision to stay or leave your company and much more.
From Patagonia to PayPal companies that do the right thing have the right results. By focusing on the story of people, society and culture they deliver the results they need for the spreadsheets.
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