ESG factors have become a well-discussed topic in board rooms and investment committee meetings. The acronym, of course, refers to the emerging significance of monitoring the environmental, social and governance practices of organizations. Investment advisors have been perfecting their metrics and analysis of these factors over the past thirty years – triggered by a 1988 article in the American Journal of Sociology called “Social Capital in the Creation of Human Capital,” which challenged the long-held doctrine of Milton Friedman and others that ‘self-interest’ is the only consideration for maximizing economic returns. Pressure grew as coalitions began using their leverage to encourage companies and capital markets to incorporate societal impacts into their decision-making. Then in 1998, business consultant John Elkington is credited with coining the phrase ‘triple-bottom-line,’ and a whole new suite of consulting was born: advising, tracking, incentivizing and penalizing organizations for their social responsibility, or lack thereof.
For most of the past three decades, the vast majority of corporate communications efforts assessed ESG considerations in either a defensive way – aiming to avoid criticism, or as a component of their organization’s community relations, more recently the ‘corporate social responsibility’ function. As the value systems of millennials and Gen Z increasingly shape the marketplace narrative, however, the ‘upside’ of reputation management with ESG has become increasingly clear. People want to do business with ‘good companies,’ and ESG frameworks are creating effective ways to develop and distinguish one brand from another in terms of commitments to sustainability, in particular. Next up, I predict: effective ways to ‘judge’ organizations’ real impact on racial equity. Talking about commitments to equity and to dismantling the consequences of racism won’t be enough for organizations looking for strong ESG scores: we’ll be looking to document progress.
We’ve begun to counsel our clients to think about ESG factors in the same ways we talk about risk:
- Assess and acknowledge your appetite for risk, in this context meaning being an early adapter;
- define and understand your tolerance for risk, in this context meaning what consequences will shake your resolve;
- create a framework and clear accountabilities for identifying and mitigating risks, in this context including an enterprise-wide process from the front lines to the board room.
The clear emergence of ESG expectations for all organizations can be a fantastic opportunity for brands to truly distinguish themselves as aligned with stated values that they are prepared to be measured against. But getting the work designed and effectively communicated to key stakeholders will be essential. Let us know if we can help you think it through.