Part 4: Executive Summary
Executive Summary: Best practices and recommended strategies for effectively communicating your ESG journey
In the concluding part four of our ESG miniseries (outlined below) – we are summing up the previous insights from our work on investor and corporate ESG perspectives, adding some thoughts on the accelerating business imperative of an authentic ESG strategy for other key stakeholder relations, and closing with some best practices for executing a strategic communications plan to effectively articulate a firm’s ESG journey.
- Overview of the ESG Landscape (“Setting the Stage”): Notable events and key developments over the past year that have shaped the landscape as it exists today
- Primary Research on ESG: Buy side perspectives
- Corporate Perspectives and ESG Communication Practices: Including how companies are communicating their ESG journey
- Executive Summary: Best practices and recommended strategies for effectively communicating your ESG journey
Investors and Corporate Leaders Focus More Intently on ESG
Throughout this series, we shared our research from a wide range of investor and corporate voices confirming that ESG has only accelerated as a key focus of their work. A rapidly changing world and the global crisis of the COVID pandemic has only served to reinforce that trajectory. Challenge and uncertainty have driven a deeper public desire for all entities of power, including corporations, to act in ways that respect the needs of the world around them.
The reality is that if one deconstructs “ESG” into its most basic principles, poll after poll shows that the public, in the U.S. and across the globe, supports issues such as environmentally friendly product design, fair treatment of workers, and responsible governance behavior from businesses. Consumers want to support and work for businesses that they feel act ethically and as good members of the communities they operate in. However, there is also a well-documented “intention-action gap” between what people say in polls and what they actually do in their behavior or spending. Working to seize the business opportunity of closing that gap to delight customers, attract great employees and avoid political/regulatory intrusions should be a significant driver of ESG actions.
It’s Not Just About Investors: Serving Key Stakeholders Holistically
The world’s largest companies have the resources and an urgency driven by intense scrutiny of their actions to lead the way on ESG innovation. The most forward-thinking of these global business leaders understands that a comprehensive stakeholder management strategy, inclusive of ESG, well-integrated into a broader business strategy, does not represent a “trade-off” with goals of profitability or franchise value. It is just smart business.
Investor interest in ESG has been pivotal to its increased importance, particularly the emphasis over the last five years, but today the conversations about why ESG matters (and to whom) have expanded well beyond the investor audience to include consideration of all key stakeholders, both internal and external. It is through this wider lens that companies are assessing their ESG efforts. What follows is detail on three key stakeholder groups, outside of the investor constituency, that matter as part of a holistic integration of ESG into your larger business strategy.
Key Stakeholders #1 - Customers
Customers want to support brands and products that can demonstrate positive societal impact. However, on average, their purchasing behaviors show unwillingness to do so at significantly higher cost, lower quality, or at the detriment to freedom of choice. Organic and sustainably produced food, for example is preferred, so long as it tastes good, looks attractive, and doesn’t cost too much. Energy efficient cars are more popular when they also perform well and look “cool” versus clunky.
Given these preferences, leading consumer-facing businesses are working hard to please their customers while maintaining core principles such as everyday low prices. They are able to do so effectively with steady pressure on their supply chain to execute change for them in all aspects of manufacturing and delivering their products. This push catalyzes a need for effective ESG actions and communications through a vast web of providers. On issues from greenhouse gas emissions to diversity and inclusion metrics, we will continue to see pressure on suppliers to get on board or lose business.
Key Stakeholders #2 - Employees
Attracting and retaining talent is the lifeblood of any business. Millennial and Gen Z workers express a clear preference to work for ethical and environmentally friendly companies. Many go so far as to suggest that they would accept a lower salary to work for an ESG-leading employer and these preferences increase with education levels. This age cohort already comprises over 70% of the U.S. workforce.
In addition, changing national demographics also put an increasing priority on thoughtfully cultivating and satisfying a diverse employee base as a business prerogative. We increasingly hear from clients that they face challenges when aging sales leaders do not connect naturally to their evolving customer base given distinct perspectives and life experiences influenced by gender, race, and age differences.
Another global ESG leader with a consumer focus, Unilever, sets a high bar for directly addressing worker and employee concerns in their ESG actions and communications.
Key Stakeholders #3 - Regulators
The Biden Administration’s top policy priorities cited after solving the COVID pandemic are “tackle climate change and advance racial equity and civil rights” where both areas of focus have clear ESG policy implications. As examples, the SEC’s new chairman, Gary Gensler, has made climate-related disclosure a top priority and the Secretary of Transportation, Pete Buttigieg, has emphasized innovation and evolving infrastructure investments to combat climate change.
In the U.S. and globally, the public has concerns regarding the concentration of power in corporations and this is leading to rising risk of regulatory challenges for business leaders as politicians reflect those fears. Use of government controls to reign in corporate power is not at all an exclusively Democratic or left-leaning issue. Concerns about the power of “Big Tech” and more aggressive anti-trust activities are examples of growing actions with support on both sides of the aisle in the U.S. While European climate policies are generally more aggressive than the U.S., even in markets like China, environmental regulation is expanding at a rapid pace. The changing regulatory environment presents both risks as well as opportunities and a company’s (or industry’s) best defense against unwanted governmental intrusion is public recognition of good citizenship.
Unilever sets a clear tone with the statement below as an introductory framing to their clear and comprehensive Code of Business Principles and Conduct that addresses topics including business integrity, safety at work, responsible taxpaying, conflict minerals, alternatives to animal testing, employee wellbeing, product safety and quality, responsible innovation, and safeguarding data.
Case Study
ESG’s Impact on Valuation: Ball Corporation - An Evolution of a Packaging Brand
Having shared some examples from global mega-cap corporations, we did want to emphasize that while some of those companies are innovating on ESG practices and shaping the landscape due to the scope of their supply-chain influence, there are plenty of examples of small- and mid-sized companies that are succeeding in integrating a deliberate and bold ESG approach into successful growth and franchise-value enhancing strategies. Ball Corp. is a strong example of such a company.
Ball Corp. was an early adopter of the incorporation of sustainability into its business operations and published its first Sustainability Report in 2008. In its inaugural Sustainability Report, Ball boldly admitted upfront, “We do not have solutions or even measurable goals for every challenge, but preparing this report has helped us to chart a clear course.” The company continues to be transparent about its sustainability progress today. In its 2020 Sustainability Report, Ball identifies the status of each sustainability related goal, including indicating goals that are ‘Behind’ schedule (see below re: waste generation). It’s important to be open about where you are at in your journey and not attempt to greenwash the areas in which you have identified weaknesses or setbacks. Your stakeholders will appreciate the honesty.
Walking the Talk
With an increased awareness of and concern for the adverse environmental impacts of plastics, Ball Corp. recognized the need to diversify its packaging mix as part of contributing to a circular economy.
“This is good for Ball, good for our stakeholders and good for the planet.”
In 2020, Ball Corp.’s efforts were rewarded when the company earned the Aluminum Stewardship Initiative (ASI) certification for all its 23 Europe, Middle East, and African beverage can plants. It’s the first beverage can manufacturer to meet ASI’s demanding environmental, social, and governance principles. Regarding the company’s efforts to diversify packaging materials (and ultimately use less plastic), Ball Corp.’s recently named Chief Commercial & Sustainability Officer said, “We’re responding to a greater desire from consumers for genuinely sustainable and infinitely recyclable packaging solutions. We’re working closely with our beverage customers to help them deliver on their sustainability commitments including on responsible sourcing practices.”
Continuously Innovating
In an announcement earlier this year, Ball Corp. made a splash with the introduction of its reusable aluminum cups. An alternative to the traditional ‘red plastic cup’ abundant at summer BBQs, the aluminum cup is plastic-free, zero-waste, eco-friendly and can be washed and reused again and again (and eventually, recycled).
Sustainability Has Been a Core Pillar of Ball Corp.’s Strong Overall Value Creation Story
Ball Corp.’s embrace of “Sustainable Growth” based on their innovation as a recyclable packaging pioneer has proven transformational for the company. The company has evolved the perception and reality of its business from being a manufacturer of commoditized packaging to one of being a distinctive innovator for an emerging circular economy. The results are clear in the company’s strong financial results and the standout shareholder creation of value, all supported by a culture that has prioritized positive stakeholder downstream impacts along the way.
Best Practices and Recommended Strategies for Effectively Communicating ESG Journeys
As we continue to counsel clients on this ever-changing, increasingly important topic, we are continuously identifying and developing best practice. With all the ‘ESG noise’ out there, we strive to cut through the fluff and deliver relevant and actionable advice that is different and additive to what you are getting from other sources.
“Box-Checking” Data Disclosure Isn’t Going Away - Get Used to It and Make the Best of It
Despite frequently reported industry discussions on a unified set of ESG reporting standards (and, in fairness, some real progress from groups like SASB), we suspect that the ESG reporting regime, particularly for global companies, will remain complex. That said, we suggest that corporate ESG leaders embrace its necessity and use the process as a checklist for intentional cost-benefit decisions. A checklist is outcome oriented and helps to organize your everyday efforts around a larger purpose: that is, following the necessary steps to achieve the desired outcome. Ensuring alignment with various standard setters and framework developers is a good opportunity to methodically and successfully move through the process of data disclosure. For example, do we currently collect the necessary data – based on the SASB Sustainable Industry Classification System (SICs) – to be able to align with SASB?
Authentically Integrate ESG / Sustainability into Your Overall Business Strategy - It Should Be a Pillar
Too often, ESG communications and disclosure are approached as a necessary risk management and compliance function and communicated accordingly. The result is something that feels tagged on and does little to address stakeholder concerns and opportunities outside of disclosure scorekeeping. An ESG strategy that flows naturally from and is integrated with a company’s overall mission and business objectives is a far more powerful leadership tool. The most compelling and authentic ESG roadmap is one that is both ambitious and realistic while also being inextricably linked to the larger business strategy. And, the sometimes-arduous details of disclosure carry far more weight when framed in a broader corporate purpose. Unilever is a great example of how a very complex global business works to integrate specific business objectives with “softer” stakeholder goals in a graphic framing of their optimization.
Create External Trust and Internal Discipline with Robust Governance Checks on ESG Performance
When companies begin to place sustainability as a core pillar of their business strategy, it becomes natural to think about how their own governance structures keep track of their progress. While some ESG leaders have created standalone sustainability committees within their Boards, our research suggests that this is still a progressive approach, especially for smaller and mid-cap companies. However, even in the absence of standalone sustainability committees, it is worth having a clear process for how non-dedicated Board committees and other oversight structures incorporate ESG into their work. Examples include questioning whether an audit committee oversees ESG disclosures as well as financial statements and whether a compensation committee considers ESG metrics as an input to performance measurement for executive compensation. If ESG is truly a corporate priority, savvy observers will expect that there are well-informed oversight professionals keeping score and utilizing both carrot- and stick-based outcomes.
Focus on Progress, Not Perfection - ESG Requires a Continuous Improvement Mindset
Communicating progress on an iterative process, such as ESG, is a journey with no finite finish line. Part of crafting an effective strategy is naturally setting a sustainable path that is not unnecessarily disruptive to the business. With that in mind, we would emphasize that it is completely acceptable (even expected) for corporate sustainability leaders to admit areas where there is room for improvement. In addition, as part of goal setting, it is good practice to set ambitious long-term goals as well as shorter-term interim goals and measure progress along the way. Future aspirational goals are more powerful and believable when they are accompanied by interval milestones or what we like to call “breadcrumbs”. Providing updates supported by clear execution proof points along the journey to 2030 or 2050 or any period five years from now, including verification by credible 3rd party sources where possible, is best practice.
Allow Your Disclosure to Mature with the Evolution of Your Business Strategy
As corporate ESG efforts mature, ideally, the associated disclosure also matures. For example, as companies consider adding Scope 3 GHG emissions disclosure – and goals related to reduction – they are engaging various stakeholders up and down the value chain to understand the holistic picture of emissions. This is important as it is estimated that ~75% of GHG emissions associated with many industry sectors derive from a company’s supply chain (i.e., Scope 3). Thus, as part of an authentic commitment to sustainability (and combating climate change) it is critical that companies incorporate Scope 3 data and associated reduction goals into their Environmental strategy.
PepsiCo began publishing Scope 3 emissions data in 2018; the table below shows how its disclosure has evolved with its ESG strategy maturation as the company met, exceeded, or altered goals along the way.
In Closing
As always, we’re grateful for your interest in our work and have enjoyed sharing our research and actionable recommendations over the past four weeks. We hope you’ve found it thought-provoking, enlightening, educational, and action-inducing.
We would welcome the opportunity to discuss how we might collaborate with you on effectively crafting and communicating your business’s ESG journey.