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ESG And The Future Of Work: 3 Strategies Every Leader Should Know

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Earth Day’s arrival on April 22 presents a timely opportunity to consider three letters that should be on every leader’s mind: E-S-G.

These letters, of course, stand for environmental, social, and governance, and assess a company’s commitment to each, be it greenhouse gas emissions and waste disposal (E), labor relations and employee safety (S), or board diversity and supply chain management (G). Though some of these concerns might seem irrelevant to the business world, more and more stakeholders — from BlackRock to consumers to credit rating agencies — are taking notice of ESG ratings. 

That momentum has not slowed with the pandemic. “The crisis has intensified and reinforced the importance of ESG issues,” said George Serafeim, a Harvard Business School professor and ESG expert. Covid-19 “should drive a deeper integration of ESG inside an organization’s core business management and strategy… ESG is no longer just about ‘feel good’ issues. We are talking about ever more important value drivers.”

Is ESG actually a value driver that enhances competitive advantage and increases ROI?

Will ESG ratings transition to “must have” status in order for companies to realize success in the future of work?

Should leaders resist the ESG “fad” and simply put their heads down and execute? Or, does prioritizing ESG drive shareholder return and maximize measurable commercial impact? 

1. Better the Bottom Line

To answer the question of whether ESG is a value driver, leaders can look to Serafeim’s own research. In one study, he found that a $1 investment yielded $28 in return over 20 years — for companies that focused on ESG. Those that did not yielded just half that: $14. In another, he and his colleagues concluded that “firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues, suggesting that investments in sustainability issues are shareholder-value enhancing.”

The consulting firm McKinsey, too, names “cost reductions” as one of the five main values of ESG. It explained that “executing ESG effectively can help combat rising operating expenses,” affecting operating profits by as much as 60%. If leaders want to reap such rewards, they should immediately begin measuring ESG metrics alongside other KPIs — because, of course, companies demonstrate what they value by what they measure.

One example is 3M (AAA ESG rating), which created its environmental policy, Pollution Prevention Pays, back in 1975. Since then, it has regularly measured and evaluated its performance on ESG metrics; in total, the company says its “employees have completed more than 15,300 3P projects, prevented more than 2.5 million tons of pollution, and saved nearly $2.2 billion.” 3M leadership has evidently found such efforts to be worthwhile, as the company continues to push environmental goals, including increasing its use of renewable energy by 50% and reducing manufacturing waste by 10% by 2025.

2. Incentivize Institutional Investors

In 2006, the UN launched its Principles for Responsible Investment. At the time, 63 companies, with $6.5 trillion assets under management (AUM), pledged to integrate ESG into their investment decisions. As of 2020, that number had grown exponentially: to 3,038 companies with a total of $103.4 trillion AUM. Clearly, institutional investors are paying more heed to ESG principles — and leaders should, too.

If companies do not prioritize ESG, Kurt Harrison, co-head of Russell Reynolds Associates’ sustainability practice, warned that asset managers may divest their shares, thereby lowering stock prices and pressuring CEOs. Other experts, including Ian Manson and Jane Stoakes, directors of Duff & Phelps’ Compliance and Regulatory Consulting practice, agree. “In the aftermath of COVID-19,” they wrote, “ESG is likely to become even more significant as both the industry and investors have time and cause to reflect on [its] importance.”

Take Best Buy. Not only does it have an AAA ESG rating, but it is also a strong financial performer, leading it to rank twelfth — the highest rated retailer — on Investor's Business Daily's 2020 list of the best ESG companies. It has a diverse board, a female CEO, and a reputation for prizing both sustainability and its employees. During the pandemic, for example, Best Buy continued paying health insurance for 51,000 furloughed workers. In a year when many other retailers suffered great losses, its profits jumped 16%. According to Anthony Chukumba, managing director at Loop Capital Markets, it was Best Buy’s strong relations with employees and ESG business practices that helped it adapt during the crisis.

3. Attract Rising Stars

According to Wharton professor Peter Cappelli, most hiring is a result of “drastically poor retention.” This issue has only been compounded in recent years, with Mercer’s Global Talent Trends 2020 revealing that nearly half (46%) of C-suites believe their organization is “ill-equipped to acquire and retain the right talent.” The “right talent,” in this context, means Millennials and Gen Z, who will comprise 75% of the workforce in the next four years. As I explained in my keynote at the recent Alternative Investments Conference hosted by Duff & Phelps, statistically, these younger generations are not ones to conform; if organizations want to win the war for talent, they must better accommodate these employee’s desires — and prioritize ESG.

Though ESG and talent may seem unrelated, they are deeply correlated. A study from Marsh & McLennan found that “employers with an attractive image among young talent have better ESG performance (25% higher) than average employers.” In the Harvard Business Review, Silda Wall Spitzer and John Mandyck explained: “For employees, robust [ESG] scores can represent pride and engagement. For recruits, they can represent meaning and purpose, critical factors now to win the competition for talent needed to keep companies sustainable.”

Leaders can look to General Mills (AA ESG rating) for inspiration. In late 2015, it announced it would cut emissions by 28% over the next decade. As John Church, the company’s chief supply chain officer, wrote: Climate change “is top of mind for General Mills’ consumers, customers and employees,” so addressing it is “imperative to the long term viability of our company.” Around the time of the announcement, 74% of employees said General Mills was a great place to work; five years later, that number had jumped to 80%. The company’s most recent Global Responsibility Report found that 90% of employees were proud to work at General Mills, a company that has committed to sustainability “from farm to fork to landfill.”

From the points above, it is clear that ESG is a value driver — and will be even more of one moving forward. If leaders want to win, therefore, they should put those three letters at the top of their business plans. As Claire Skinner, regional managing partner at Heidrick & Struggles, concluded in an article for the World Economic Forum: “Business leaders must now turn positive ESG talk into long-term results… In post-COVID-19 society there will be an inevitable urge to return to the status quo, but companies that ‘waste the crisis’ by failing to innovate may fall behind.”

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