Ed. note: Our office will be closed Monday in observance of President’s Day, so no blog will be published. We’ll be back on Tuesday.
I recently blogged on the need to simplify communicating ESG and yesterday I wrote about what Bob Eccles called “the sorry state of sustainability.” While not immediately apparent, these two topics are directly related. Making ESG easy to understand by management, executives and boards helps gain internal allies and gain credibility. Corporate progress would improve from clarity and simplicity in showing the business value of ESG. So this will be the first in an “occasional series” of blogs on simplifying the ESG/sustainability message and business case.
My view is that we should use mainstream terms such as “business” or “strategy” rather than calling out ESG specifically, especially when we expend so much energy on finding the right words rather than doing the right things. Some argue that we must push companies and change them in order to be successful at ESG – and that means expanding their view of the world, culture and vocabulary. That may be true to some extent, but more companies will likely respond to “business-first” conversations – particularly at the beginning of their ESG journey.
Or when things stall, which is what Bloomberg’s Matt Levine wrote about earlier this week, himself quoting from a recent WSJ article on a slowdown in ESG hiring:
“Companies are reconsidering the priority given to ESG programs and their pursuit of top ESG scores in response to pressure from investors seeking faster returns on investments, [executive search firm employee Joe] Dubbin said. ‘In delivering meaningful environmental and carbon-reduction programs, the financial returns are a long way away.'”
To couch ESG in “business-first terms,” start with a Business 101 mindset. A very simple way of looking at how executives think about their companies is this:
Revenue – Expenses = Profit (Stock Price + Capital Acquisition)*
Essentially every action executives and management take connects to this basic formula. Compare that to the typical ESG/CSO view of the business:
| Environmental | Social | Governance |
|---|---|---|
| Energy Use Climate Risk Waste Management Water Use Wastewater Land Use Reuse/recycling Compliance | Human Rights Employee Safety DEI Supply Chain Environmental Justice Compliance Climate Impact | Internal Controls Procurement Auditors Fraud Compliance |
This isn’t intended to be a complete list of topics and it’s not in any particular order, but it’s fine for our purposes here. Some may notice that reputation and risk management are not included – those are special situations I’ll address later.
In the next installment of this series, I’ll show how these two viewpoints can easily connect in simple, conclusive ways.
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* Stocks and capital acquisition are a bit different and I’m not going to focus on those – not every company has stock and stock prices are influenced by current or projected profitability (and, unfortunately, by irrational human behavior). Tying ESG directly to stock price is controversial and not definitive – the same generally goes for capital acquisition except in certain cases like sustainability or climate-linked bonds; linking ESG to revenue, expenses and therefore profit is easier and can be definitive as this blog series will show.
