[Ed. note: You can read Part 1 of this series here, along with Part 2 and Part 3.]
In Part 1 of this “occasional blog series,” I introduced a very simple model of how executives think about business. In Part 2, the original model was expanded to reflect elements of current conditions and expectations of future conditions:
If we apply the expanded model concept in Part 2 to the ESG/CSO model from Part 1, we get something like this:
Following this general structure, business opportunities come from finding future improvements over a current (actual) situation. These can be revenue increases and/or cost reductions – improving operating profit. Honestly, it’s that simple. This makes it easy to see how the ESG and executive perspectives can come together – linking ESG topics to actual current cost and benefits and projected costs and benefits. Frequently, CSOs/ESG staff put the topic/activity/issue top of mind – assuming that someone else will convert it into costs, benefits and an ROI – or perhaps ignoring that altogether. That is no longer the right way to manage company ESG programs. In today’s ESG world, CSOs/ESG staff must put more effort into demonstrating how they directly contribute to company profitability. This Wednesday, I blogged about a new report on CEO expectations of ESG ROI. As another example – former AllBirds Head of Sustainability said in a recent LinkedIn post “a huge part of [her] work at Allbirds was proving the business case of sustainability.”
On the cost side, CSOs/ESG staff should
- clearly identify and quantify baseline costs of company operations before implementing ESG initiatives;
- determine cost reductions achieved by company operations as a result of implementing specific ESG initiatives; and
- investigate potential ways to reduce costs of implementing ESG initiatives going forward.
On the revenue side, the same overall thought process applies:
- clearly identify and quantify baseline revenues associated company operations before implementing ESG initiatives (this may need to be limited to a specific product or product line);
- determine revenue changes (hopefully increases!) after implementing specific ESG initiatives; and
- confirming that the revenue changes are actually a result of ESG initiatives.
That final point is typically the most difficult to prove as many factors are at play when customers make purchasing decisions. I’ve written in the past (such as here and here) relying on customer survey data reflecting what they “would” or “might” do is not recommended since customers are notorious for not following through. An academic working paper published in October 2022 by European Corporate Governance Institute laid claim to an empirical method for connecting the dots and filtering out other influences. I haven’t finished reading it to make my own assessment (thanks to Alex Edmans, I am more aware of my own confirmation bias so, while I want to believe it…) The point here is that it will take effort (and maybe additional data) to establish credible causal links between ESG initiatives and revenue growth. Frankly, cost savings generally are easier to identify and link to ESG initiatives – and many times can be done without additional accounting or IT systems (although admittedly, they make it easier if they are set up correctly from the start).
Hopefully, this blog series will help you take a fresh look at the business value of corporate ESG programs, and the importance of keeping it simple.
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