Polarization around ESG continues to intensify as parties with varying and often conflicting ideologies and interests debate its relevance and impact. Those involved are shifting their approach, often downplaying the term itself. As ESG matures and evolves, effective leaders practice seven actions:
1. Listen to the content of criticism and acknowledge issues with ESG – By taking concerns seriously, effective leaders create the next level of maturity of ESG. They know that ignoring and/or failing to address criticism reduces the credibility and effectiveness of ESG efforts. For example, critics find flaws in data collection and analysis methodologies for the environmental and social factors of ESG that leaders need to address. And, while the most successful ESG funds may outperform the market, others lag, which creates issues for investors in a down economy that fund leaders need to address. Additionally, many critics raise concerns regarding the significant costs and resources associated with ESG reporting and compliance requirements.
2. Tone down ideology; make it about the business – Effective leaders avoid falling into the trap where anything associated with ESG is good (halo bias) or anything associated with ESG is bad (reverse halo bias). Effective leaders focus on objective factors related to resilience and performance when discussing ESG. For example, a plastics company addressing GHG emissions and product pollution can highlight how these efforts impact long-term viability. For an oil and gas company, carbon reduction and risk transfer strategies illustrate a shift into new markets for renewable energy and a reduction in multi-year capex. For a financial services organization, ESG investments may attract new customers. Across industries, programs supporting employee wellbeing may drive productivity, engagement, and retention. Effective leaders connect ESG actions to business benefits and outcomes.
3. Be clear in the rationale for ESG – Effective leadership actions for ESG action generally fall into three often overlapping categories reflecting company philosophy, strategy and approach. Practices differ for companies that take a:
· Compliance-driven approach (where ESG actions primarily are focused on satisfying compliance requirements, regulators, and/or exchange rules)
· Social responsibility-driven approach (where ESG actions are based on company values and purpose)
· Strategy-driven approach (where ESG actions are integrated into company strategy and operations)
Effective leaders determine appropriate actions based on their business rationale for ESG, and link those actions to business performance, risk management and value creation.
4. Emphasize ESG’s individual parts – Effective leaders increasingly are abandoning grand proclamations about ESG and instead talking about the impact of each component on business performance – the E (through climate), the S (through social responsibility and employee wellbeing) and the G (through corporate governance). While ESG itself can be a polarizing term, a focus on climate risks such as hurricanes and fires on factories, distribution centers, and call centers allows for business continuity. A focus on employee wellbeing helps drive engagement and performance, and a focus on underserved markets drives growth and value creation. A focus on governance drives effective strategy execution.
5. Measure ESG outcomes and be transparent – WTW research found that 77% of major companies across North America and Europe include ESG metrics in their executive incentive plans, an increase from 68% last year. Companies empirically measure ESG as a distinctive weighted metric about half the time and qualitative assessment of ESG performance remains a common practice. It has become widespread to use a combination of quantitative and qualitative measures in corporate ESG reports. Effective leaders strive to use objective measures and transparently disclose definitions and progress wherever possible.
6. Focus on real impact – As ESG matures, effective leaders are realistic about the effects of ESG efforts, as well as costs and benefits associated with short- and long-term ESG activities. They are mindful of both “greenwashing” (where an organization spends more time and money portraying itself as environmentally friendly than actually minimizing its environmental impact) as well as “greenwishing” (environmental economist Duncan Austin’s term for well-intended efforts to make the world more sustainable that fall short of aspirations).
7. Use a lens of stewardship – Effective leaders understand that for businesses to thrive, they require stewardship – the careful and responsible management of assets, liabilities, intangibles and equity. Investors increasingly are pressuring boards and management teams to be more effective long-term stewards of the enterprises entrusted to them and more responsive to the constituents they serve. Current debates about the efficacy and wisdom of ESG focus on specific issues, whereas stewardship is broader and less ideological. In order to fully capture the business fundamentals needed for long-term resilience, viability and growth, effective leaders focus on the broad range of issues that include performance and protection priorities in addition to purpose, people, and planet.
Effective leaders focus ESG actions on both short- and long-term value creation, viability, stability, financial performance, and growth. Pushback on ESG is a sign that it is evolving, with stakeholders taking steps to make climate, social responsibility, employee wellbeing, and corporate governance efforts more consistently tangible, meaningful and measurable – regardless of what they are called.
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