There is an interesting divergence between generations in the discussion around environmental, social, and governance investments that a company may make.
The definition and acronym itself (ESG) highlights that imperative. For baby boomers and some Gen X, the term may be familiar as a set of initiatives that make a company feel good. That could include philanthropic giving or volunteer activities by employees. Some are familiar with the acronym, while others can sometime recognize these activities when they see them. For millennials, however, the expectation is different. Millennials are often not familiar with the term ESG, however, they almost universally expect more than these basic activities. They expect that environmental, social, and governance risks are proactively managed beyond events and activities. They expect these factors to be considerations in daily business decisions. They expect this of companies they invest in, companies they buy from, and companies they work for. Company leaders can embrace these principles and risks to support sustainable profit and growth.
Let us step back for a minute and define and describe ESG as it relates to company risks and uncertainty in business decisions. Environment in this context includes decision making that considers risks and impacts related to climate, energy, emissions, recycling, and resources like water. Social impacts include human rights, labor relationships, safety, supply chain, and training. Governance includes external board and advisor structure, succession planning, leadership diversity, and financial value. Many of these issues run deep. Supply chain for example is more than understanding the supplier that provides windows and doors. It also includes the manufacturer, the raw material supplier, the sustainability of the forest where the wood is harvested, and the labor conditions of those working throughout the chain.
These expectations matter for all three major stake holders and they no longer apply only to large corporate companies. They apply throughout the business chain from the largest organizations to the smallest start-up. Proactive company activities, have demonstrated improved efficiency, sustainability, and profitability.
Investors and lenders. To grow a business, chances are you engage with either investors, lenders, or both. Millennials are twice as likely as others, to make investment decisions based upon companies that promote an ESG culture that is in alignment with the investor. For example, some investors indicate a preference for companies with at least one woman on the board. This is more than just a diversity issue. It indicates the desire to include diverse opinions and experiences; leading to better run organizations. Interestingly, this desire is motivated by financial considerations as much as by social conscious. ESG strong companies have proven to have lower cost of capital, better operational performance, and higher stock prices. In addition, they tend to have higher brand image, customer loyalty, and employee engagement.
Employees. Those who have children who are young professionals in the work force or those that frequently hire from this pool, often see these cultural expectations on display. These individuals value community engagement, and decision making that incorporates ESG considerations in companies where they work. The war on talent is an overused term, but we all know what it means. Hiring the best, and ensuring continued high employee engagement, expects that companies focus on proactively incorporating these factors into all decisions as a core cultural competency. Without it, the company will continue to lag in employee satisfaction and retention, and spend far more on training and re-training, and find decreased efficiency and productivity.
Customers. We see this demonstrated in customer buying preferences every day – organic, natural, sustainable. Customers also consider human rights and worker conditions, company ethics, and corporate oversight when making buying decisions. It is a given, that the ESG friendly product needs to perform as least as well as the non-ESG friendly product, but once the product is over that hurdle, its sales will increase faster, with more positive brand image. Millennial consumers especially, have grown up in a world where these issues, risks and concerns are part of the fabric of their society, so the change certainly appears to be one of generational change, rather than a life change.
Addressing these risks does not need to be overwhelming for a small organization. It is possible to start small and still have a big impact.
Some easy steps for small businesses:
A. Expect employees to spend some work-time supporting sustainability and/or the community. That is more than just allowing these activities when asked. This means, the company culture expects this behavior.
B. Understand your supply chain. Not every supply chain decision will be able to address ESG issues, however, understanding the risks is the first step. In some cases, understanding these issues may not change your decision, but even making it a consideration will, over time, allow you to understand the ROI of each decision and ultimately make some different ones.
C. Establish a company purpose. This is not the same as ‘what we do.’ A purpose is closer to ‘why we do what we do.’ That guidepost can inform many operational decisions and keep the company focused on its reason for being.
D. Consider proactive recycling programs. It often surprises companies that recycling can be more cost effective that traditional waste disposal. Spend some time to review the alternatives before making a decision.
E. Create board or advisor directed policies and architecture to promote a structure around ESG risks and decision making. These guide posts will serve the business leaders well in evaluating all alternatives and selecting ones that will generate not only profits, but sustainable profits.
F. Communicate your commitment. Even if small at first, communicating your commitment will be noticed by investors, employers, and customers. In 2018, this can still set you apart. By 2022, the lack of this commitment could leave you behind.
ESG is no longer merely a charitable donation or volunteer activity. Embedding these practices into every operational business decision, is a requirement for sustainable, profitable growth. Not acting on this risk will leave a business behind the curve, while proactively addressing this risk, will lead to growth and sustainability.
Bank of America and The Greater Minneapolis St Paul Regional Economic Development Partnership recently led a discussion on the risks and rewards of this emerging topic. The message and call to action should be eye opening for every business, in every industry, and of every size. Thanks to these organizations for raising the bar and generating important insights.