Embedding ESG Principles (Part 1)

I’ve been reading a lot about ESG in the last couple of years, and have been tracking it as a trend for some time now. It has become more mainstream in the business world through different lenses: Sustainability, Sustainable Investing, Triple Bottom Line, Sustainable Development Goals, Impact Investing, Social Entrepreneurship, and many more. These are all convergent, in my view, and in order to clarify these concepts, I’ve developed a point of view on how they map to each other:

Conceptual Framework of Various Thrusts that ESG Supports for SDG Outcomes

A Push From The Top

Larry Fink’s (BlackRock) letter to the CEOs in his portfolio outlined what he’s expecting from them — profits are just the entry ticket, but what really matters is reducing income inequality through better support of the employees, communities, and society at large (not just putting on the occasional show to care); being sustainable (not just complying with regulatory mandates); and having more diligent governance and greater transparency in and about their businesses (again, not just complying with the letter of the law). This letter galvanized CEOs to do something but it seems like a lot of activity done in haste and without much introspection; a sort of modern-day ‘greenwashing’, if you will.

CEOs’ Commitment From the Trenches

The anti-CEO playbook | Hamdi Ulukaya | Copyright — 2019 TED(C)

Hamdi Ulukaya, CEO of Chobani (a leading global yogurt brand), believes in values that espouse ESG principles, in his ‘Anti-CEO Playbook’, a playbook that “sees people again; that sees above and beyond profits”:

• Be a Noble Leader: The purpose of a CEO is to be a “noble leader”, by which Ulukaya implicitly invokes an age gone by, but rapidly coming back into the spotlight. Lolly Daskal, an eminent speaker and writer on the topic of leadership expounds on this topic of ‘noble leadership’: “gives us a noble sense of importance, a sense of moral support, a sense of honor, a sense of encouragement, and a sense of visibility.”
• Put Employees First: The company must take care of its employees first and foremost and not profits— if the employees are taken care of, they, in turn, will take care of the enterprise and drive its success. Ownership of the enterprise will further strengthen the bond between employees and the business. Wherever possible, make it such that the employees share in the success and failures of the company. They will rally their support during down-times and share in the abundant success of the good times.
• Integrate Within the Community: Instead of wrangling incentives from already-struggling rural counties or towns, enterprises are in a better position to contribute to and drive community development. Instead of asking for handouts, companies should offer these communities their support through employment, training, education, all of which will also benefit the company itself, through greater profits and a reliable, domestic workforce.
• Take a Stand on Responsibility: It has been a traditional stance for business to follow regulation but stay on the sidelines on policy and controversial issues. This can happen no more — companies must pick a side, and risk alienating a certain group of consumers that do not agree with their decision or stance. However, taking a stand endears the company to a whole other set of consumers who have aligned beliefs and values. Governments globally are becoming more gridlocked and unable to impact the population on policy matters. Companies are in a better position to enact and ‘live’ the policies that Governments want to carry out.
• Recognize the Consumer: The business reports to its consumer — take care of the consumer’s explicit, implicit and unmet needs and the consumer will be loyal with their daily / weekly spend on the company’s products and services. Consumers are fickle, and can switch brands anytime. Give them a reason to love your product or service. Your product or service must align with the beliefs and expectations of the consumer, and this can yield greater profit and loyalty.

Measuring ESG is a Start But Not Enough to Embed

Implementing projects is easy. Qualitative and quantitative measurement is a must, and already exists in various forms: MSCI, Refinitiv, Sustainalytics, and others; in fact so many different ways to measure exist that there are no standards, but they will likely converge in the near term, as we approach critical mass for the ESG mandate. The measurement question risks the larger imperative of embedding ESG and not just making it ‘yet another sustainability related initiative’ on the corporate agenda. We have witnessed in the past few years many companies simply ‘greenwashing’ their actions with a veneer of supposedly good deeds which have had a limited impact but have lulled both enterprises and consumers into believing that the initiatives have been meaningful.

So How Do You Embed ESG?

Let’s talk first about some of the clear DONT’S:

• Don’t make it a project— projects have a beginning and an end, and if ESG is treated like a project, it will logically come to an end at some point. ESG is a way of working that must be embedded into each part of the enterprise such that the principles of ESG form the basis for how each function operates and how a company deals with its partners in its business network ecosystem.
• Don’t preach, but act — we have all seen enough examples of lofty mission statements and words of intent, but not enough action. Action shows clarity in thought and execution about what levers of ESG the company wants to exercise and what results it will likely achieve.
• Don’t boil the ocean — act in small but meaningful ways. Think of small things that can make a difference and start implementing them. Don’t create a massive movement out of it that requires a lot of resource and effort, since it will likely fail right at the beginning. Build momentum slowly, and function by function.
• Make it work IN the company and not just ON the company — this is somewhat subtle, but ESG isn’t some initiative that is ‘above’ the company but make it an integral part of the company, one that works in every nook and cranny ‘within’ the company. In other words, embed it within each action and functional decision and not just something that a select group of people must do to ‘achieve’ ESG.
• Don’t create a leadership position — we see many new titles like ‘sustainability manager’ or ‘chief sustainability officer’ — so long as these positions are for reporting the outcomes that’s fine, but expecting these roles to actually embed ESG is misguided and will likely fail. ESG is not a ‘role’ within an organization but in fact an entirely different ‘way of working’ of the business.

So, what you need to do is to make ESG an integral element of the fabric of the company. How do you do this? Go ahead and read Part 2.