“No stories without numbers and no numbers without stories.”
Katie Martin, the lead principal for sustainability and environmental, social and governance work at supply chain risk management firm Avetta, regularly leans on that maxim from her past nonprofit experiences when working with clients on ESG matters these days. The phrase both gets at the ongoing evolution of the ESG movement and addresses the recent backlash against ESG from critics who say the concept has metastasized into a cottage industry more concerned with looking good, winning awards and making money off gullible investors.
Since it was developed into a full concept more than 15 years ago, ESG has grown into a big business: Investment research firm Morningstar says funds with an ESG focus attracted more than $51 billion in net new funds in 2020 and another roughly $70 billion last year. But that growth also has produced levels of hype and froth that have strayed from the original concept’s core elements and led to charges of greenwashing or the pushing of a partisan agenda. And while it’s relatively easy—and likely true—that the hype and overextension from original goals are growing pains the likes of which so many other new ideas and approaches have gone through, they also bring with them the risk that ESG’s PR problem will irreparably taint it and that progress on its goals grinds to a halt.
Thus the need for Martin’s mantra, which other experts expressed to IndustryWeek in similar terms. The marketing benefits from reaching this consulting firm’s ESG standard or winning that association’s stamp of approval are peanuts compared to the value of digging deeper and, in Martin’s words, turning ESG work “from a marketing exercise into a business transformation exercise.” That means putting in the work to better understand and quantify a company’s emissions and other societal impacts as well as company processes and supplier relationships and risks. Doing so will enable companies to integrate sound fundamental data with their business goals while reducing risks and building the ability to have a positive impact beyond their bottom lines.
“This is a way to build an ironclad business that isn’t cutting corners,” said Juliana Hess, who last year co-founded the Oxford Impact Collaborative and is chief impact officer of property tech startup InsureTek. “If you do it right, you are leveraging opportunities to build a very strong infrastructure that is innovative and resilient without exploiting any single stakeholder.”
And that infrastructure will have a better handle on a company’s risks, a task that remains a top priority of any board of directors or leadership team. Put succinctly by Joss Tantram, a founding partner at consultancy Terrafiniti LLP in England, “governance is viewed by investors as a proxy for a well-run company. It tells them whether a company has recognized and identified its material social and environmental risks and dependencies, whether it has responsibilities, rewards and structures in place, and how it will organize itself to drive performance and disclose its progress.” In short, it’s a plan that can and perhaps should guide how a venture seeks to grow in the 21st century.
More companies are coming around to this view and approaching ESG with far more than the marketing or compliance lenses of its early days. Hess pointed out that a majority of companies already are doing many of the right things from an ESG perspective without even realizing it. Applying an ESG lens can provide a sturdier base on which to build out that work. An indicator of the growth of such foundational approaches came this summer in the form of a 400-executive survey by LEK Consulting and Longitude in which half of responding organizations said they see ESG as a growth driver while another 20% view it as an innovation tool.
Forward Motion, Facing Pressure
Still, ESG can be a big meal to digest. Take, for instance, just one aspect of its environmental part, decarbonization. As Patricia Provot of Armstrong International wrote recently for our sister brand EnergyTech, the simple-sounding idea of reducing carbon emissions can be overwhelming. But, she added, the methods to do so already exist and are readily available to all organizations. It’s a matter of putting proven approaches into practice.
“Simply attaining [the] first two parallel steps of minimize and optimize puts leaders in a place of forward thinking, forward motion, and on the path toward net-zero emissions,” Provot wrote.
That mindset applies as effectively to the other facets of ESG and the big goals behind the movement. How they’re labeled and how companies choose to market their work in the area is—or at least should be—secondary. Yet there is pressure on executives and other leaders: A 2019 paper from the NYU Stern Center for Sustainable Business cited a PwC study saying that 56% of public-company board members think investors are focusing too much on ESG–double the number from a year earlier.
Their concerns—as well as the nagging idea that executives and board members are under attack from ESG evangelists—were amplified that year by Securities and Exchange Commissioner Hester Peirce, who told an American Enterprise Institute audience that “the ESG tent seems to house a shifting set of trendy issues of the day, many of which are not material to investors, even if they are the subject of popular discourse.”
And yet: With the long-term tailwind of greater disclosure at their backs, large investors are setting this agenda and aren’t backing away from insisting on ESG’s basic premises as well as the idea that those principles will deliver not only a halo effect but also a higher stock price multiple. Lois Yurow, a strategist at corporate communications agency Labrador, said companies thus risk generating mistrust among investors if they stiff-arm ESG inquiries.
“Even if you know in your heart that you’re doing the right thing, investors want to see proof and numbers—and the work underlying those numbers,” said Yurow, whose firm this month published the 2022 edition of its Transparency Awards.
Yurow, who earlier in her career guided clients through the SEC’s Plain English push for more concise company disclosures, places the current ESG environment in a long-term trend. Plus, she said, there’s an element of peer pressure among companies in wanting to keep up with those who have committed to meeting or exceeding certain standards. And that peer pressure will seep over to private companies doing business with listed firms or being backed by private equity, adding to the air of inevitability that ESG considerations in some form are here to stay.
Compliance Plus
Those considerations also are likely to be increasingly codified. The SEC this spring proposed a rule to standardize listed companies’ reporting on the risks they face or could face from climate change. The agency’s proposal also would require companies to disclose their greenhouse gas emissions as well as “certain climate-related financial metrics.” Whether and how that specific rule gets enacted is unclear—a group of state attorneys general have tagged the proposal as “paternalistic” and say it is the kind of overreach the U.S. Supreme Court deemed improper in its Environmental Protection Agency decision earlier this year—but the market watchers IndustryWeek spoke to see it as one more step on a journey toward a more standardized ESG reporting framework.
“Companies are trying to respond to investor demand, but investor demand is all over the place,” Yurow said, adding that many executives she works with receive all manner of ESG-related surveys, each slightly different in focus. “It’ll help to have a baseline of sorts to work from—and some companies will then want to go beyond that.”
Avetta’s Martin said standardization will clear up a lot of noise around ESG reporting and thus help companies better focus on their priorities. Over time, she said, an overarching body could emerge to oversee ESG processes in the way the Occupational Safety and Health Administration fulfills its role rather than letting companies or consultants define safety standards.
In short, there’s more to come on this front. And experts say a crucial component of ‘getting it right’ will be leaders communicating well internally and externally about how their organizations are adopting ESG principles and adapting to changing market conditions. Inside organizations, Hess said, it is crucial that leadership give middle managers and below a view on how ESG considerations are being woven into the company’s strategy and contribute to their realization. Martin said good ESG alignment across an organization, ideally led by dedicated and specialized executives, feeds into workers’ desire to be proud of where they work and helps turn high-level ideals into on-the-ground actions. Bit by bit, the hows and whys will become clearer and some of the emotional baggage that has attached itself to ESG will begin to fall away.
“I don’t think people need to be scared of ESG in any way,” Hess said. “Plus, it’s less important what we call it as long as we can have a positive impact.”
