The line between purpose and ESG

Nossa Capital
Nossa Data
Published in
7 min readNov 30, 2021

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I listened to a great podcast this week where the speakers dug into the differences between purpose and ESG. I often speak in this newsletter around the varying definitions of those two words but given how much the many new (and old) participants in the ESG industry struggle to grasp the differences, I wanted to focus on it again.

How are purpose and ESG aligned:

A point I love to bring-up is that ESG, and purpose, fundamentally need to come from the top. Your organisation cannot be strong when it comes to ESG without a top-down buy-in / commitment and neither can it be an organisation run with purpose. To be a purpose or an ESG run organisation you need those initiatives pulsing through the firm, they CANNOT happen within a single department.

What are examples of a purpose-run company? Purpose-run companies fundamentally aim to make positive social and / or environmental impacts based on the way they run their core business models. Often their customers feel aligned to their fundamental purpose when making the decision to buy from that brand. Some examples of very purpose orientated companies include:

Patagonia: Our criteria for the best product rests on function, repairability, and, foremost, durability. Among the most direct ways, we can limit ecological impacts is with goods that last for generations or can be recycled so the materials in them remain in use. Making the best product matters for saving the planet.

Beyond Meat: Our mission is to create The Future of Protein® — delicious plant-based burgers, beef, sausage, crumbles, and more. By shifting from animal to plant-based meat, we can address four growing global issues: human health, climate change, constraints on natural resources, and animal welfare.

Unilever: At Unilever, we share one simple purpose: to make sustainable living commonplace. Across all our household brands, spanning Home Care, Beauty and Personal Care, Foods and Refreshment, we are creating a bright future for our business and our planet.

What is ESG’s focus: ESG starts from the lens of risk assessment. Strong ESG organisations can certainly have a strong corporate purpose, but they focus their time and energy on understanding the core risks, social and environmental, that could impact their business model. How can you think through ESG:

  • Start with financial materiality, what is core to your business model and stakeholders
  • Tie ESG goals to clear targets and time-horizons
  • Communicate progress against those goals

Can a company strong at ESG become purpose orientated? Yes! That is why I speak so frequently on this topic because when one ends and the other begins is not clear. Often, after a company has shown clear progress and progress against their financially materially goals, the next step is to move into a deeper emphasis around corporate purpose.

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Company ESG Ecosystem Graph — 2021

Companies are faced with a growing list of external stakeholder pressure when it comes to their ESG disclosure. We understand that alongside building technology to ease the ESG disclosure burden, we need to continue to educate the market on how the entire ecosystem looks and is developing. This is our 2021 draft of external disclosure expectations placed on companies. If you are responsible for ESG at a company and want help understanding external stakeholder expectations, reply to this message and we can arrange a call. Notice something missing: comment on LinkedIn.

Reach Out!

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ESG reporting: The intersection of values and value
Companies have come under pressure to discuss how they work in the interests of all stakeholders, not just shareholders. On top of this, investors are pushing companies to better explain how ESG issues are affecting the bottom line and valuations. How should companies respond to the growing pressure from investors and other stakeholders over ESG issues?

  1. Assess and identify the risks and opportunities that are material and relevant.
  2. Identifying what should be measured and goal setting.
  3. The disclosure itself.

IR Magazine.

What’s the Cost of Buying Good ESG Companies?
How do equity analysts rate “good” ESG companies versus “bad” ESG companies? For Sustainalytics this involves their ESG Risk Rating Assessment aimed at identifying material risks facing each company — these could be climate risks, human capital risks, risks of ethical breaches — and score the companies according to the magnitude of these risks and the potential impact they could have on revenue and profits. Sustainalytics estimates what percentage of these risks is manageable, and nets out these manageable risks to arrive at the bottom-line risk exposure. Companies with negligible ESG Risk face little or no danger to future cash flows from ESG factors. Companies with severe ESG Risk — think fossil-fuel producers — face severe threats to future cash flows. Morningstar.

How Companies Shape Ecosystems to Achieve Sustainability and Advantage
Tips for Companies to use Sustainable Business Model Innovation.

  1. Shape customer demand / preferences
  2. Expand distribution channels
  3. Improve supplier practices
  4. Increase transparency in ecosystem
  5. Raise/set new industry standards
  6. Establish position as dominate platform / infrastructure
  7. Attract / catalyze funding for innovation in ecosystem
  8. Collective action for join R&D across the ecosystem
  9. Influence / shape regulations and gain government support

BCG Henderson Institute.

A Top CEO Was Ousted After Making His Company More Environmentally Conscious. Now He’s Speaking Out
Danone: Faber had turned Danone into an “enterprise à mission,” France’s new category similar to an American B-Corp, whose purpose was far broader than profits and growth. He named his strategy “One Planet, One Health,” and created a carbon adjusted earnings per share indicator, pegging Danone’s success directly to its environmental performance. While that brought applause from climate activists, the company’s shares lagged behind peers like Nestlé and Unilever during the pandemic, as sales of some key Danone products like Evian water plummeted. Do CEOs now face an impossible dilemma: Either to please their shareholders, or to join the fight for climate justice and social equity? Faber had placed those issues at the core of the company.

ESG investing has a sustainability blind spot: supply chains
Nearly every company’s operations are backed by a global supply chain that consists of workers, information, and resources. To accurately measure a company’s ESG risks, its end-to-end supply chain operations must be considered. Most ESG rating agencies do not measure companies’ ESG performance from the lens of the global supply chains supporting their operations. Even when companies collect their suppliers’ performance, “selective reporting” can arise because there is no unified reporting standard. One recent study found that companies tend to report environmentally responsible suppliers and conceal “bad” suppliers.
Fast Company.

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\\ Paper Highlight \\

The importance of Climate Risk for Institutional Investors
According to the survey about climate risk perceptions, institutional investors believe climate risks have financial implications for their portfolio firms and that these risks, particularly regulatory risks, already have begun to materialize. Many of the investors, especially the long-term, larger, and ESG-oriented ones, consider risk management and engagement, rather than divestment, to be the better approach for addressing climate risks.

How have firms responded when asked about climate change?

What are the perceived greatest investment opportunities from climate change?

What are the main reasons to incorporate climate risk assessments?

Read the paper.

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