Last month, I was thrilled to moderate a virtual panel, Measuring Stakeholder Capitalism, on what I believe is a very important topic. The World Economic Forum’s International Business Council (IBC), a working group comprised of 120 CEOs, is consolidating all existing ESG frameworks (SASB, GRI, MSCI) into a single set of global standards.
In August 2020, the IBC is scheduled to finalize these ESG metrics, which are currently being piloted across several leading organizations. With the support and involvement of the Big Four accounting firms, the IBC is thinking through the operationalization and implementation of ESG across companies of all kinds. To educate board members on the IBC’s efforts, Diligent hosted the June 2020 panel. Acting as the moderator, I was joined by:
We were all deeply gratified and excited about the strong positive response, interest and engagement that came from the audience of this event. We received over 130 questions—consolidated into a list of the Top 10 Questions—which we’ll use as a roadmap for our discussions in the weeks ahead. In this article, I dive into the first and most fundamental question: “How can we communicate the value of ESG—and encourage boards to embrace and adopt these metrics?”
Pinpointing the Obstacles
Whether you’re a board member, executive, governance or compliance professional, you’re likely going to encounter some resistance to ESG at various levels of the organization—sometimes including the board. I suspect that the resistance to ESG is actually a lack of clarity around the term itself. For many boards, conversations thus far around ESG have been a collection of buzzwords or alphabet soup. Confusion continues to build with the many frameworks and rating agencies out there to choose from.
Stated simply, many board members are trying to discern exactly how ESG initiatives drive long-term value and organizational success. Inherent in the board’s fiduciary duties, a responsibility to the shareholders has always been hardwired—and the tie between ESG and financial performance is not always evident. How can we help boards connect the dots?
Why Boards Should Be Paying Attention:
ESG investing is estimated at over $20 trillion in AUM—roughly a quarter of all professionally managed assets around the world—and continues to surge year over year. Even in 2020’s pandemic turmoil, sustainable funds are attracting record inflows, suggesting a fundamental shift vs. a bull-market phenomenon.
According to IBC Chair Brian Moynihan in Diligent’s June 2020 panel: “…if you don’t [begin to take ESG seriously], the capital in your companies will start to channel away from you. That isn’t a threat, it’s just what’s going to happen as more and more people sign up to the [ESG] principles…”
Additionally, we see large institutional investors now targeting companies that are not making progress quickly enough. Investors like BlackRock, known for withholding votes on companies with insufficient board diversity, are now extending the same tactics to climate change. From BlackRock’s latest Investment Stewardship report:
In 2020, we identified 244 companies that are making insufficient progress integrating climate risk into their business models or disclosures. Of these companies, we took voting action against 53, or 22%. We have put the remaining 191 companies ‘on watch.’ Those that do not make significant progress risk voting action against management in 2021. — BlackRock Investment Stewardship report
Any governance professionals, executives or board members who are struggling to elevate ESG issues to their board should start by sharing recent reports on ESG investment trends and engagement philosophies, which can be a powerful attention-grabber.
Furthermore, companies with stronger commitments to ESG are shown to exhibit less risk and greater financial performance than other companies. In a recent NASDAQ study evaluating the 2019 MSCI ESG rankings for the S&P 500 companies (which is highlighted in my recent white paper ESG History & Status) sustainability leaders exhibited 6.4% less risk than the market, while sustainability laggards showed 10.2% greater risk. When observing the company’s ROIC, leaders displayed 22.3% greater capital efficiency while laggards showed 12.8% less. The implementation of ESG is not only helping those companies through their profits and attractiveness to investors, but is also now hurting companies lacking the attention to ESG criteria.
I imagine we’ll see more and more studies exploring the tie between ESG and company performance in the months ahead.
With the increasing population of the millennial workforce, this desire to work for ESG-focused companies is magnified. In a 2019 study by Fast Company:
Therefore, placing a great emphasis on ESG criteria will help a company’s ability to both hire the new generation of workers and retain them over the long run. The shift towards stakeholder capitalism will also lead to more revenue from products. A 2018 JUST Capital survey also found that 85% of respondents expressed a willingness to pay more for a product from a sustainable company that serves stakeholders well.
In sum, ESG allows for hiring and retaining employees at a lower cost, selling products at a higher cost, and being a more attractive opportunity for investors.
In the end, companies that recognize the importance of adapting to changing socio-economic and environmental conditions and focus on stakeholder capitalism are better able to identify strategic opportunities and meet competitive challenges. Among my favorite real-world case studies is Starbucks in their expansion into Asia:
For years Starbucks struggled to gain momentum in China. Yet, in an effort to better understand their local stakeholders, they stumbled upon the answer: offering healthcare to their employees’ parents. This simple change in policy created strong alignment with traditional Chinese family values and gained Starbucks favor and loyalty from its Asian employees. Soon after, sales growth skyrocketed, and now Starbucks has 2,000 stores in one of the world’s fastest growing markets. Just a great example of how a stakeholder-first strategy can benefit everyone involved.
The advantages of ESG are becoming more and more tangible by the day. Anyone still trying to elevate ESG issues to their board can start by highlighting the points above, sharing the relevant research cited, and educating their board on the work of the IBC. Watching the replay of Diligent’s June 2020 panel is a great place to start.