In our previous blog, we explained what ESG (Environmental, Social, Governance) stands for and why organizations need to pay attention to this growing movement in the corporate and governmental world. Now we will go a bit deeper on where and how it affects organizations.
Who in an organization is dealing with ESG initiatives?
In short, everyone should be. Environmental & Social aspects will influence how people be able to function and work, and how the company is looked upon by its stakeholders, where as the governance part will ensure the appropriate controls are in place to operate within the proper ethical and legal boundaries.
Management & Board of Directors
Recently we have seen a shift from shareholder management to stakeholder management, illustrated by the US Business Roundtable’s 2019 statement that states that “while each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders”. Business leaders not only have to engage with their shareholder but also with a much wider group of stakeholders, as there are customers, employees, suppliers or the communities they service or work in. They all have great impact on company’s leadership & status. ESG is going to the core of a company’s identity, represented by its leadership, and with the global availability of social media, the impact of a ESG-related event, whether positive or negative, is felt more directly, rapidly & deeply than ever before. This is regardless if the event or its coverage originated from inside the organization, for example because of unhealthy working conditions, or if it came from an outside source, for example from activists complaining about the company's supply chain causing environmental issues or customers being vocal about non-recyclable packaging.
At the same time employees indicate company purpose is of great important. A McKinsey study revealed that 82% of employees found it important that their company has a purpose and 72% believed the purpose should receive more weight than profit. Yet only 42% felt their organizations’ purpose statements drove impact.
Purpose is at the core of a business:
Why are we in business?
What does the organization stand for?
What is its impact on the world?
Purpose forms a key building block of its leadership’s strategy and helps to inspire & engage employees, customers and the wider public. It also helps shape the organization’s culture. All ESG initiatives & priorities will be unmistakably connected to its purpose and as such should be a critical component in it leadership’s thinking process and action plans. Ultimately, ESG initiatives should be linked to the executives’ compensation & incentive plans to remunerate progress and results in the ESG domains.
Consequently the leadership team should put more thought into answering some essential questions from an ESG perspective:
Why is the company in business & what does this mean to our community?
What does the company stand & is this view aligning with the values of the employees and customers we want to reach?
What is its broader impact on the world?
What are the long-term strategy and objectives regarding ESG?
What ESG objectives does the company set itself and what defines success?
Are its business operations in line with the requirements and concerns of your community?
When & how does it report on its results and progress? And what is being reported?
Is it inspiring its employees & engaging its stakeholders around its ESG programs?
HRM
The HR domain will be significantly influenced by the environmental and social evolutions that are taking shape in the world, and should get actively involved in the organization's ESG initiatives.
Social & sustainability initiatives have been proven to engage employees, ensuring higher employee engagement, lower staff churn (loss) & a much more efficient recruitment level.
Improving health & education of the workforce leads to lower absenteeism and better motivation, immediately impacting the productivity. In a media report late January 2021, Statistics Canada was quoted stating that the Covid-19 death rate was twice as high in neighborhoods with over 25% of people of visible minorities, compared to neighborhoods with less than 1% of those visible minorities. This is very impactful for any organization that has a facility located in such a neighborhood: it is likely to face multiple challenges, ranging from low employee moral and recruiting challenges to operation interruptions due to high absenteeism, all of which are directly related and caused by social inequality. Any organization that gets actively involved in improving the health and social conditions in the community it operates in, will see an immediate return in terms of employee engagement and productivity.
With many roles changing because of the COVID-19 impact on workplace organization and the rapidly evolving technology, companies focusing on training, up- & reskilling will gain a significant competitive advantage in the market, not only from a staffing perspective but also from a productivity one, ultimately leading to higher profitability.
Fair & equal compensation will remain another hot topic on the HR agenda, given the increase visibility and transparency this initiative has received over the past years. Especially the younger generations will no longer accept these inequalities, making immediate action highly necessary, if the organization wants to be able to continue to attract top talent.
More companies are taking action to have a workforce that is representative of the society they operate in, but lots still remains to be done. Those organizations who are not acting right now are at risk of being called out, with potentially significant negative impact to their businesses. The same applies to the composition in organizations’ board rooms, where studies show diversity is still lacking far behind. But there are positive signs: at the end of last year for example the NASDAQ filled a proposal with the SEC that would require listed companies to have at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+. Companies that do not meet the standard would be required to justify their decision to remain listed on Nasdaq. Although the final CES decision on whether to approve or reject the NASDAQ proposal will likely only come out this summer, it clearly demonstrates the growing momentum and awareness that exists around ESG initiatives, and the traction this momentum is gaining.
Production & supply chain
Companies are not only being judged by how well they treat their own people, but also how their supplier and distribution channel partners are operating. Child labor, or poor or unsafe working conditions within facilities abroad are being highlighted and publicized, damaging the company’s reputation and sales in its main markets, while strikes and demonstrations might impact the supply lines.
Questions will be asked around the ecological footprint and sustainable character of the supply & distribution chain:
Are they utilizing renewable energy sources or still operating on fossil fuels?
What is happening with the waste they producing and what is their level of pollution?
How do they impact the surrounding eco-system & inhabitants?
Because of globally available mobile, social & digital media, any shortcomings in the supply chain will be in the news immediately, potentially creating a tidal wave of negative exposure, again affecting the company’s image & brand negatively.
On the other hand, companies that are actively engaging with their supply chain partners in sustainability activities & working together to drive lasting ecological and social change through their channels will be able to attract positive global support and publicity. These organizations will be viewed as forward-thinking and market leading, and can open untapped markets and attract new customers.
Sales & Marketing
ESG initiatives can become a key factor in market & product positioning, with Fairtrade certificated products as a key example. It has allowed companies to position themselves uniquely in this market segment and address a loyal and growing clientele. Another example is the Certified Organic marking, which helps ensure the integrity of organic products from field to table. Again, participating producers are able to distinguish themselves from their competitors and attract new customers.
At the same time, questions are being raised regarding marketing campaigns:
Are these producing extra (non-) recyclable waste?
Does only the company benefit from this campaign or are there benefits to the community? And if so, what are they?
Lastly, with the vastly growing usage of digital & social media campaigns, there is however a growing concern from the wider public regarding data privacy and control that will need to be addressed, as part of the organization’s governance model.
Finance
This is the area where the governance & control mechanisms come into play to an even larger extend. Organizations have an increasing need for well-documented and secure processes to handle financial transactions and manage accounting practices. These processes need to come with the necessary checks and balances, together with clearly defined reporting and verification lines. These are just the basic measures an organization has to put in place to have a starting level of governance set up and operate within the prevailing legal and juridical boundaries. Depending on the domain the company operates in, the applicable rules and regulations can be far more stringent (related to credit card handling, financial reporting, legal & financial registrations, just to name a few). Failing to do so can have severe consequences for the company and it leadership.
I2ACT is here to support you
You can not tackle all these domains at once, at the same time, so management will need to select and set priorities. The best way for management and board to address this is to work this process methodically and start with educating itself on ESG, discuss objectives and opportunities, and research what level of know-how and experience is already available within the company. Following that, it can put its strategy together, set its key priorities & review possible quick wins, and then develop a step-by-step action plan with the clear goals, metrics & communication moments, before ultimately moving into action. In essence, it will be applying the I2ACT philosophy. And while this sounds extensive, this can be initiated quickly, within a few days or weeks, depending on the size of the organization and project.
I2ACT can assist you in the various stages of this process, either with advisory services or active engagement:
Assist the executive teams and Directors Boards with:
Education on ESG
Determining the organization’s current state & views, as well as its future aspirations, objectives and
Developing the ESG strategy, setting the priorities and the related goals & metrics
Implementation & execution of the ESG strategy
Create stakeholder engagement
Review (and possibly redefine) the company purpose with ESG in mind
Facilitate internal discussions & forums to discuss ESG & develop solutions
Work with management and HR to create change management & communication plans to successfully take the organization through the process
Develop supplier and customer engagement & action plans, with clear goal, in cooperation with the involved departments
Work with the sales and marketing teams to create renewed market and brand positioning plans, update USP’s & communication statements and develop sales-oriented education and training tracks
For more information, send us an email or call (647) 985-4296.