There are many who criticize – or attack – ESG. I myself have been critical about how many companies view and implement it as I previously blogged here and here, and wrote about extensively in Killing Sustainability. Credible academic studies methodically argue both sides of the issue, creating conflicting references for business reality.
What to do?
I had a great conversation this weekend with a former long-time news anchor and member of the media, who bemoaned his view of the disappearance of critical thinking. That struck a note with me and I think it is spot on for the business case for ESG. Two recent articles provide examples of different ways to think about ESG that may contrast with most of the noise out there.
Carbon Risk Management/Net-Zero Plans
Net Zero is frequently a paradox – doing something about it usually means doing nothing really. Diligent recently wrote about consequences of falling behind on carbon risk management. While some of this may be going over old ground, the article offers new angles on things that demonstrate my point about critical thinking in ESG:
… companies that ignore net-zero risk being left behind. “Importantly, how does the company compare to its peers?” UBS’s Crawford writes in the Insightia report. “If peers are aggressively improving their ESG profile and the company lags even in a relatively benign industry or with palatable ESG standings on an absolute basis, it is still a target.”
As Diligent detailed in a blog post earlier in this year, leading on sustainability gives your organizations a competitive edge with both customers and talent, two increasingly important competitive differentiators as the Great Resignation continues. Both groups increasingly expect companies and brands to do more to reduce their carbon impact and put people and planet before profit.
Such competitiveness is also a matter of risk management. ClientEarth lawyer Paul Benson shared his perspectives on Shell’s situation for the Guardian, pointing out physical risks to transitional risks to stranded asset risk. For the latter, “Their assets — for example their facilities, their physical infrastructure — the value of that is just going to reduce or it will become a liability as the net-zero transition progresses. And they are exposed to massive write-downs of those assets,” he said. “We think, frankly, the longer the board delays with this the more likely it is that the company is going to have to execute this sort of handbrake turn to retain commercial competitiveness.”
But managing risk is only one side of the competitive equation. Successful companies will also need to move with agility into the future, and net-zero action plays an important role here as well. “I believe the decarbonizing of the global economy is going to create the greatest investment opportunity of our lifetime. It will also leave behind the companies that don’t adapt, regardless of what industry they are in,” [BlackRock CEO] Larry Fink declared in his 2022 letter to CEOs. “The next 1,000 unicorns won’t be search engines or social media companies. They’ll be sustainable, scalable innovators.”
All of this comes back full circle to shareholder activism, which is proving Fink’s and others’ points. “Underperforming peers on key areas of ESG that are considered material for your company’s particular industry will likely attract activist attention,” Alliance Advisors Managing Director Etelvina Martinez writes in the Insightia report.
Another article – in Forbes – discusses a survey of executives that shows ESG is at the top of their agenda, but they may be struggling to execute and communicate company initiatives and value.
… the attention paid to these adjustments signal growing interest in ESG from shareholders and the general public. People genuinely care about ESG. But what do ESG issues look like when translated into executive to-do lists?
To answer these questions, ServiceNow and ThoughtLab surveyed 1,000 executives worldwide across five sectors: manufacturing, telecom, healthcare, financial services, and the public sector.
The good news: every sector is making progress toward achieving their ESG goals. But there’s tremendous variation in how they’re going about it—and what they’re missing.
Organizations across all sectors know they’re facing tremendous pressure to make measurable progress on ESG. Survey respondents reported an average “medium to high pressure” to set and meet ESG benchmarks.
While analysts have traditionally framed ESG as a public opinion issue, most respondents reported otherwise—that employees and shareholders, not the general public, are pressuring them to make progress on ESG fitness.
Most organizations are dealing with that pressure by focusing on the “E” part of ESG: environmental sustainability. Net-zero carbon emissions and renewable energy sources are top of mind for most executives, especially those at companies in the earliest stages of crafting an ESG strategy. Survey respondents who said they’re just starting to think about ESG are using green energy sources as a jumping-off point.
What This Means
Even though much emphasis is on C-suites for demonstrating ESG success, they are only setting the direction. As I have long argued, the value and success of ESG really lies at the operational level – everything else flows from there.
The question is – how can you make your CEO’s vision real? To an extent, it may be easier than you expect, if you think about it. Some basic ideas include:
- Plans must be pragmatic.
- Establishing stretch targets and goals is fine, but they have to be based on reality. Carbon reduction plans that rely on supplier and power utility actions may not be particularly real. Completely eliminating child and slave labor from your global supply chain is also – sadly – not possible yet. C-suite mandates along these lines simply aren’t achievable.
- Metrics must be meaningful at the operational level.
- ESG initiatives and goals must be supported by all levels in the company. This doesn’t have to mean changing your existing culture – instead, find ways to fit ESG messaging/metrics into current culture.
This is a very short list to wet your whistle. There are a lot more ideas if you think about it, not just reacting to the cacophony of information flooding your inbox.
We were founded on this idea of helping companies apply critical thinking to ESG, and supporting practical execution of programs. We believe that there is real value in ESG, but its implementation has to be done thoughtfully – not simply by sprinkling ESG fairy dust on shares. Not only do I promote this idea in our blogs, but member resources including checklists and guidebooks are usable tools giving members explicit guidance on not only examples of what to do, but how to think about ESG topics in relevant and apply that to your own setting.