The Why and How of ESG as a Priority for Business
In last week’s post, Why Viewing Sustainability Through a Consumer Lens May Help Boost the Bottom Line, we talked about the growing consumer demand for companies to embrace sustainability.
And this type of consumer sentiment isn’t letting up.
According to Morning Consult’s latest Taking the Temperature report—which helps track how Americans feel about energy and climate—41% of consumers surveyed indicated they were “very concerned” about climate change:
The report also identified two periods of “peak” concern associated with specific events:
After the Intergovernmental Panel on Climate Change (IPCC) released its report on Aug. 9 with its dire warning about the planet’s warming trends—when 46% of respondents indicated they were “very concerned.”
After Hurricane Ida hit and caused so much devastation in several parts of the country.
The report also noted that Gen Z adults “are on average the most concerned about climate change, with the ‘very concerned’ share hitting 52% twice since tracking began in May.”
So what can companies do to ensure they’re on track to address climate concerns and align with what consumers want and need when it comes to these types of ESG issues?
According to global consulting firm PwC, being prepared for the “ESG Revolution”will be key.
In describing the fundamentals of ESG, a 2020 Harvard Law post notes that “ESG grew out of investment philosophies clustered around sustainability and, thereafter, socially responsible investing.” Early on, the focus was on excluding companies that didn’t seem committed to ESG efforts, but more recently, the focus has shifted toward expecting more by favoring companies “that are making positive contributions to the elements of ESG, premised on treating environmental and social issues as core elements of strategic positioning.”
Although climate issues are a big part of ESG consideration, the concepts of ESG frequently overlap with one another. Even so, the post authors describe the three categories of ESG as follows:
E: Relates to “energy efficiencies, carbon footprints, greenhouse gas emissions, deforestation, biodiversity, climate change and pollution mitigation, waste management and water usage.”
S: Includes “labor standards, wages and benefits, workplace and board diversity, racial justice, pay equity, human rights, talent management, community relations, privacy and data protection, health and safety, supply-chain management and other human capital and social justice issues.”
G: Is associated with “governing of the ‘E’ and the ‘S’ categories—corporate board composition and structure, strategic sustainability oversight and compliance, executive compensation, political contributions and lobbying, and bribery and corruption.”
Public opinion also plays a role in ESG dynamics: “As more companies provide ESG disclosures and commitments, and given the speed of social media responses and the news cycle, observations about a company’s ESG actions or inactions are often published and sometimes go viral. …”
PwC’s 2021 Consumer Intelligence Series survey on ESG underscored the priority that both consumers and employees are placing on the ESG efforts they expect from companies.
In the spring of 2021, PwC polled 5,005 consumers, 2,510 employees, and 1,257 business leaders in the US, Brazil, the UK, Germany, and India about their expectations from business related to a number of important ESG issues.
Key findings included various dynamics that demonstrated how participants viewed the importance of ESG efforts; a gap in perceptions regarding what’s actually being done; and the types of things company executives struggle with when it comes to setting ESG priorities.
“83% of consumers think companies should be actively shaping ESG best practices”
“86% of employees prefer to support or work for companies that care about the same issues they do”
“91% of business leaders believe their company has a responsibility to act on ESG issues”
However, the survey also identified “a glaring disconnect between consumer and management perception. Many more executives than consumers believe that companies are increasing investments across ESG issues.”
When it comes to perceived barriers to ESG progress, the executives surveyed ranked “Balancing ESG with growth targets” and “Lack of reporting standards and regulations/complexity” as the top two and cited additional barriers as:
Lack of support from senior leadership
The volatility of regulatory requirements
Challenges associated with “quantifying potential ROI”
Not enough funding
Not enough time
Presence of corporate silos
But the good news is that PwC also offers an array of strategies to help companies improve their ESG efforts—like the three listed in “Are You Ready for the ESG Revolution?”
PwC refers to them as “The three dimensions of the ESG revolution,” and depicts them as being interdependent and dynamic with the potential for each to serve as a catalyst for the others:
Strategic reinvention: “Translates ESG aspirations…into a blueprint for where and how to compete”
Business transformation: “Drives ESG strategy and reporting into the heart of the business, often informing and extending ongoing digital transformation”
Reimagined reporting: “Enables the measurement and management of ESG factors, such as carbon emissions, workforce diversity, and supply chain sustainability”
PwC offers an in-depth explanation of each, which are available by accessing the resource.
Creating Value with ESG
As noted, some of the business leaders in the PwC survey cited the ability to quantify the potential ROI of ESG efforts as one of the barriers to ESG progress.
In “Five ways that ESG creates value,” McKinsey & Company describes five ways companies may be rewarded for their efforts, with specific examples of each:
Top-line growth: By offering more sustainable products that help to attract both B2B and B2C customers and gaining increased access to resources through stronger relations with community and government entities
Cost reductions: By lowering energy and water consumption
Regulatory and legal interventions: By gaining “greater strategic freedom through deregulation” and earning “government subsidies and support”
Productivity uplift: By boosting the motivation of current employees and attracting new talent “through greater social credibility”
Investment and asset optimization: By enhancing return on investments through improved allocation of capital for the long term and avoiding investments that may not pay off as expected “because of longer-term environmental concerns”