Jordan McDonald courtesy of unsplash

Reframe Risk and Reputation with ESG

There is a growing opportunity for investors, operators and board members to use ESG (Environment, Social, Governance) as a framework for improving commercial success. Last week Blackrock released Larry Fink’s annual letter to CEOs entitled “Profit & Purpose”, highlighting the role that ESG plays in creating long-term value and growth for global companies.

My experience leading ESG for a Fortune 1,000 global company fundamentally changed the way I think about risk, reputation and commercial advancement. ESG cuts across every business vertical, horizontal and diagonal, and its principles can be used to drive commercial transformation, increase customer loyalty, build brand reputation, and improve employee engagement.

Last week I attended a conference focused on the role of ESG for today’s investors and firms, led by Wilson Sonsini Goodrich & Rosati and the NYU Law Institute for Corporate Governance and Finance. Three dynamic panels discussed new standards for corporate governance and how forward-thinking leaders are using ESG to create innovation and profit, in alignment with company purpose.

While ESG may still be elusive for some, here is my simple guide on how to apply it to your business, and to reframe risk and reputation for greater long-term value.

The “G” — Governance

Call it policy and procedures, bylaws, or best practices — governance is the way your company manages everything from shareholder dividends to employee evaluations. Governance cannot be an afterthought, it must be a proactive set of guidelines and rules that the company leadership plays by and that the employee and customer base understand clearly.

Governance is now joining environmental and social impact to play a more visible role in shareholder engagement, and is a core part of corporate culture. Companies with good governance are less likely to have environmental or social issues, in particular when their reporting and measurement systems are aligned. Investors, customers and employees look for transparent reports that go beyond pure financial statistics and include environmental impact, diversity rates, employee turnover and more.

The “E” and the “S” — Environment & Social

Think of these as a categories of risk. Quite simply, companies need to take a more holistic view of their stakeholders and assess their impact on these. Stakeholders can be narrowly represented as employees, customers and investors, or more broadly viewed to include the communities you do business in, natural resources, channel partners, and more.

Employees (S)

Employees are one of the most — if not the most — important stakeholder for any company, and the way in which a company responds to their needs and engages with them is a crucial determinant of long-term value.

Millennials are entering and moving up the ranks of the workplace at astonishing rates, having surpassed Generation X in 2015 as the largest share of the U.S. workforce. In a recent Deloitte survey, Millennials said they expect companies to be agents of “positive change,” and that the ability to be involved with good causes in the workplace helps them feel more involved and influential. For Millennials, it’s important that the companies they work for (and the businesses they support) embrace values that are aligned with their own, which include environmental and social responsibility.

Similarly, the next generation of employees will be even more purpose-driven. Media-strategy firm MNI Targeted Media recently conducted a survey of Gen-Z’ers (individuals born between the mid-1990s and mid-2000s) and determined that they are “among the most purpose, passion and values-driven talent cohort in the workforce, evident not only in how they make purchasing decisions, but in what they look for in their employer and career trajectory.”

Having a workforce of individuals who value ESG values in their choice of employer, requires a leadership team that understands these values and can translate them into engagement, satisfaction and retention. Leaders who are dedicated to improving working conditions, enhancing the diversity of their teams, and engaging actively in their communities (online and offline) will be more successful in recruiting and retaining the best talent. And loyal, passionate employees who feel valued are an intangible good that strengthens the brand of the company and improves the overall productivity of the workforce.

Customers

All companies say that they are customer-centric, and that increasing customer engagement is part of their plans for long-term growth. But ask yourself; Does the demographic of the teams making product decisions to satisfy the core customer’s needs resemble the customer demographic? How closely does the senior leadership and board represent the customer the company serves? How engaged has the customer been in the development and communication of the company’s strategy for long-term value creation?

Acquiring, retaining and delighting customers is ultimately what distinguishes company success, but to build structures, systems and products that create deep customer engagement and loyalty, brands need to mirror their target customers’ ideals. Like employees, customers want brands to share their values and be empathetic to their needs — and that includes leadership teams. This is where the business case for diversity is so strong.

With public and investor pressure around issues like climate change, diversity, and transparency, boards, investors and leaders who use an ESG framework to evaluate risk and opportunities will be better positioned for innovation and long-term success.

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