Building Blocks of ESG

Just over two years ago, in August 2019, a prestigious group of American CEOs known as Business Roundtable announced a change to its statement on the purpose of a corporation. Actually, they completely tossed out the old statement and introduced a new one—for the first time in 22 years.

Instead of being exclusively about maximizing shareholder returns, the group declared, companies should also deliver value to their customers, invest in their employees, deal fairly with suppliers and support the communities in which they operate.

The Roundtable’s pronouncement came nearly 50 years after freemarket economist Milton Friedman wrote an essay titled, “The Social Responsibility of Business Is to Increase Its Profits”—and 14 years after the term “Environmental, Social and Governance” (ESG) was coined.

Now solidly embedded in the global business lexicon, ESG has assumed a role unimaginable five years ago. Setting and achieving ESG goals is no longer a nice-to-have but an urgent necessity for companies battling to win over customers, employees, investors and other stakeholders.

The reality today is that there’s a compelling business case for pursuing an aggressive ESG agenda—even if it wasn’t necessary to comply with everincreasing mandates tied to combating climate change. Consider:

• Consumers increasingly are willing to pay a premium to go green—upward of 70% would pay 5% more, all else being equal, McKinsey research shows.
• Companies increasingly are requiring suppliers to show they are adhering to the same sustainability standards and other measures of ESG—or risk losing their business.
• In a historically tight labor market, ESG is proving a key to hiring and retaining talent; 70% of employees say they are more likely to stay in a job with a sense of purpose.
• Investors now see climate risk as investment risk—as Larry Fink, CEO of BlackRock put it—and will invest in sustainability even if it means accepting returns 2-3% lower.

“That’s why you see pressure from the institutional investors that are saying, hey, show us the data around ESG,” said Stuart R. Levine, chairman and CEO of Florida-based strategy and leadership consultancy Stuart Levine & Associates. “Don’t tell us that you have a poster program on environmental issues. What are you doing to use more recyclable fiber in your materials? What are you doing from a social point of view to attract and develop a more diverse workforce?”

Against this backdrop, more and more companies are looking at how they can cultivate an internal culture that supports a strong ESG program. Experts say strong leadership, effective communication, employee empowerment and a shared sense of ownership are keys.

Building from the top down

As with any aspect of company culture, strong leadership from the board and senior management is crucial to setting the agenda for the entire organization.

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