Two-thirds of executives reported that the Covid-19 crisis acted as a catalyst for increased focus and action on ESG.
Consider the crucible of the Covid-19 pandemic, the overnight-shift to a remote workplace amidst at-home schooling pressures, the cultural inflection point around systemic racism, the increasing influence of younger generational voices challenging the inherited status quo values of work, the Great Resignation, weather events, sociopolitical unrest and a collective questioning of what really matters and how do we want to shift a collective trajectory that’s crashing into itself: it’s not the same world.
People and investors increasingly want socially responsible, inclusive, and sustainable organizations that positively impact on people and the world, not only on their own bottom line. And they want the proof.
How ESG Became a Business Imperative
As Pedro do Carmo Costa, Co-Founder and Director at Pulsely, observes: “For many years, (ESG) was considered an accessory after the main business decisions were made, almost to compensate, but more recently, the logic is reversed. More than ever, investors, CEOS, suppliers, and talent are realizing the value of a company is not only linked to generating revenue but also to the ability to contribute and create a positive impact…ESG is now influencing business decisions instead of being an afterthought.”
And it’s not just about external pressures to evolve. ESG is about adopting a wider and longer-term lens of value creation. Whereas many organizations have treated ESG and earnings as distinct and even contending priorities in the past, investors and executives are seeing that a solid ESG proposition deepens the connection with stakeholders, employees, communities and customers and acts as a safeguard for a company’s resilience and long-term success. Sustainability and profitability can be complementary lenses: an ESG-focus generates more wealth.
Companies are increasingly finding that ESG is a business advantage. People prefer (58%) working at companies that demonstrate social and environmental commitments, as well as buying from them, paying more for their products and investing in them. Revenue from sustainable products is growing nearly six times the rate of non-sustainable products.
In 2020, ESG-oriented investing had gone up 55% across four years. 88% of investors agree that companies prioritizing ESG initiatives stand to gain from better opportunities in the long run. EY found that 90% of global institutional investors actively revise investments if companies do not consider ESG criteria in their business model.
Many companies have seen a positive correlation between ESG scores and financial returns. In a study of 1,000 C-level business leaders, 64% said a focus on ESG enables stronger financial performance and 73% of financial leaders reported it helped deliver better results. ESG performance was linked with: increased revenue growth, greater shareholder value, better talent attraction and retention, improved customer satisfaction, and stronger teamwork and corporate culture. McKinsey found that across >2,000 studies of impact of ESG propositions on equity returns, 63% had positive findings. Only 8% had negative findings, and increasing employee productivity is among five key ways that ESG connects to cash flow.
The Impact of DEI in your ESG Strategy
Whereas prior emphasis has been on the environmental criteria (E) of ESG, investors are realizing sustainability begins with people - and are including DEI performance in the investment analysis.
How well a company is performing at DEI is a good indicator of its social sustainability. If ESG is an evaluation of a firm’s collective consciousness, then the impact on “human resources” and the community should also be regenerative and inclusive (not extractive and exclusive). Companies with an inclusive culture will be championing equal opportunities, ethical sourcing, fair wages and flexible working.
When it comes to DEI, the social criteria (S) of ESG reflect the relationships your company has, and reputation it fosters, with people and institutions in the communities it does business. Governance criteria (G) are the internal systems of practices, controls and procedures by which a company conducts itself internally and externally.
McKinsey highlights that ESG boosts employee motivation and attracts talent through greater social credibility. Companies that are listed as “best to work for” generated 2.3% to 3.8% higher stock returns annually across 25 years: job satisfaction benefits firm value. Evidencing that DEI is integral to satisfaction and risk-management, organizations with ineffective DEI initiatives were 32% more likely to have climbing resignation rates.
DEI is not only part of S and G but interwoven through ESG. Poor ESG leads to greater systemic inequities, whereas an "ESGD" approach that focuses through and on addressing systemic inequities strengthens all of ESG: from being tapped into how an environmental issue affects different communities to being transparent about pay and promotion in your governance.
Proactively, research has shown gender-diverse boards are more ethical and investment efficient with increased likelihood that social issues, climate change and work/life balance are on the agenda. Retroactively, companies are taking reconciliatory actions for exposed DEI inequities like inequitable pay because their reputation for social responsibility is at risk.
As highlighted in our Pulsely Session, an increasing demand for more transparency and accountability around social criteria includes pressure to increase diversity in executive leadership and on boards, report on pay equity and promotion rates, and reflect on how organizational composition reflects the communities served. The DEI aspect of ESG can be the most difficult for investors to assess, calling for leadership engagement and find a data-driven approach to tracking progress and reporting results.
Yet quantifying the “social criteria” of DEI is effectively the challenge that Pulsely was founded upon and it is possible. As the demand for rigor behind ESG metrics escalates, how will your organization button up your DEI case for investors?
DEI Accountability in ESG reports
Across the world, there are presently over 600 disparate ESG reporting provisions. This lack of standardization and consensus of tracking data obscures transparency. The new sustainable business imperative, per Forbes, is migrating to unified frameworks that give a complete picture across the entire value chain and make for holistic steering.
Over 120 companies have partnered with the World Economic Forum (WEF) to co-design a new set of universal metrics and disclosures, the Stakeholder Capitalism Metrics, that seek to drive progress towards the UN Sustainable Development Goals. The standardized metrics seek to create convergence, comparability and consistency in ESG reporting and disclosure among leading global private standard-setters. The four pillars of non-financial disclosures center on: people (including diversity and inclusion, pay equality and gaps, and wage level), planet, prosperity and principles of governance. 70 firms have adopted the approach. To address similar challenges, the US Securities and Exchange Commission (SEC) introduced new human capital disclosures requirements in 2020 and the International Sustainability Standards Board (ISSB) was created in 2021.
As written in GreenBiz.com, “One of the most beneficial things a sustainability leader can do, regardless of the maturity level of their company, is to prepare for known challenges.”
If your organization hasn’t begun or advanced the DEI metrics journey, it’s time to get on the curve and ahead of requirements:
- DEI data baseline: Define what and how you will measure and establish a complete data-based picture on where you are beginning from. Creating this benchmark of standardized, high quality tracking data will allow you to focus your DEI strategies and measure your progress.
- Clarity on DEI goals, strategies and accountability: With senior leadership and stakeholders on board, prioritize your strategy focus areas, identify how they will be measured, and put in place “consequential accountability” in performance evaluations.
- Stakeholder communications: Transparency begins with ensuring stakeholders are aware of your DEI commitments, programs and results - such as in your annual sustainability report.
Experts like Pulsely exist to support in collecting, assessing and reporting on standardized and advanced DEI metrics. No organization is required to tackle the “known challenge” of DEI accountability alone.