If your board hasn’t considered how environmental, social and governance (ESG) issues may affect your business model, supply chain and customers, it may be time it did.
New research from the Rock Center for Corporate Governance at Stanford University and ValueAct Capital, provides more compelling arguments to support corporate investment in ESG. The fact is, many companies neglect to seriously explore how linking business strategy with ESG issues can positively impact their future growth until they experience an ESG-related crisis. The recently released white paper, “The Business Case for ESG,” uses case study analysis from ValueAct and the Rock Center’s governance experts to make the argument that companies that make the effort to incorporate ESG-related factors into their decision making can have greater long-term success.
This new study could be more beneficial to boards than others in that it provides detailed examples of how two companies actually tackled their ESG issues with positive financial results. Environmental, social and governance issues are unique to each company. Therefore, each board must be willing to develop a process to determine if providing resources to address ESG issues can create a long-term economic benefit for the company.
Based on the case studies and analysis in the paper, the authors conclude that, “Some companies can benefit from a foundational shift in their business model to explicitly address stakeholder concerns, leading to more sustainable long-term economics. In some cases, it requires that management and the board be amenable to collaborating with stakeholders to determine how to achieve those changes or with a significant shareholder to champion this decision among the broader shareholder base. Ultimately, certain incumbents whose industry faces significant environmental or social challenges can create value and generate returns by more centrally focusing on addressing those challenges.”
For example, the paper points out that by investing in creating a more sustainable supply chain for the business, a company can improve customer satisfaction (which can lead to premium pricing), attract better talent to the organization and perhaps even reduce costs. Those are positive outcomes worth pursuing.
While the white paper focuses on financial benefits, addressing ESG issues that are important to stakeholders – including investors, regulators, customers, suppliers and employees – can help the board avert negative incidents that could lead to regulatory fines, customer dissatisfaction, proxy fights and other problems. The business case for ESG shouldn’t only involve quantifiable financial gains, but it can also be about the benefits of engagement. Effective engagement with stakeholders always unearths information that can be used to the company’s benefit. Working to solve environmental and social problems can improve a company’s reputation and create loyalty among its employees and customers, which are important to the organization’s sustainability.
ESG issues will continue to gain attention, whether it be employees pushing workplace culture issues, such as equal pay and diversity policies, or investors demanding companies address climate change. Since most of the Democratic candidates for president are in support of some form of climate change related legislation, it might be good for boards to explore how addressing climate change could potentially benefit their company and stakeholders — now. The current anti-regulation environment won’t last forever. Ultimately, it’s up to corporate board members to determine how eliminating ESG concerns will bolster their business in the future.