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Now is the time to seize not stop the ESG agenda

August 14, 2022

Co-written by Debra Sobel, co-Founder and CEO, Verity London and Ben Lazarus, Partner and Head of Consulting, PwC Israel
 
With two very different vantage points, we share a view on the evolving world of ESG. Whilst making predictions is impossible and dangerous, we see a path emerging to a maturing ESG strategy and deeper communications.


Let’s talk about ESG


Although the simple meaning of this three-letter acronym is Environmental, Social and Governance, it has evolved for many into something of a catch-all term for all the good things a company is supposed to do. For its detractors, these good things are distractions from the core activity of business to maximise profits for its owners.


So, is ESG about real-world impacts on environmental factors, social issues and corporate governance, or is it just “woke capitalism”? Is it businesses dressing up initiatives and greenwashing claims to convince customers, investors and employees of aligned values and ethics? And in the worst-case scenario, actually being a part of the sustainability problem itself.


While we’ve witnessed the unprecedented growth in ESG investment – it is now, for example, the fastest-growing segment of the asset management industry – we’ve also recently seen an increasing growth in anti-ESG sentiment. This is for many reasons – a downturn in the economy, war in Europe, cost of living crisis and also a feeling that businesses lie about their sustainability credentials to sell more product.*


Whether we’re talking directly about ESG or broader “responsible business”, encompassing purpose, culture, employee engagement, partnerships, supply chains and more,  in the current economic environment and against the increasing commentary and cynicism around these issues, we understand some business leaders feel anxious about the approach they should be taking when it comes to driving positive change for people and planet. How can you steer the right course and indeed, how positive will it be for the bottom line?


We believe that any controversy around ESG is a point of adaptation. ESG will continue to mature and become an increasingly important topic, integrated within the context of the overall DNA of the companies that report it. To reverse course and go backwards now, is short sighted.


This is exactly the time to seize, not stop the ESG agenda 


And here’s why:
·       Investors, customers and employees are not separate constituencies, where only one can benefit. According to Professor Alex Edmans in his landmark book, ‘Grow the Pie’, they are inter-related stakeholders “on the same team”. Profits and shareholder returns will be a by-product of seeking to improve returns for all of society.
 
·       Whatever the political map – and we recognise it’s complicated – the reality is that employees, especially the younger generations want to work for organisations that look after their people and stand for a higher purpose. These sentiments are not going to change, with topics such as diversity, inclusivity and sustainability major decision-making factors. From one very narrow prism, companies that look after their employees have been shown to attract and retain better talent and can build longer term sustainable growth.
 
There are numerous data points to support this. For example:

The 100 Best Companies to work for in the US delivered stock returns that beat their peers by 2.3% to 3.8% per year over a 28-year period. They also generated future profits that beat analysts’ expectations. And while the jury is still out on whether ESG positive companies outperform the market as a general rule, it seems statistically clear that they do in European stocks and indices, but not quite yet in other markets.
 

·       The 2022 PwC Global CEO survey ventures that “We found that highly trusted companies are more likely to have made net-zero commitments and to have tied their CEO’s compensation to nonfinancial outcomes, such as employee engagement scores and gender diversity in the workforce.”
 

77% of consumers are motivated to purchase from companies committed to making the world a better place

(2019 research, Aflac)

According to a new Sustainability Sentiment Tracker 2022*, efforts to address climate change and employee health, safety and wellbeing are two of the top five concerns in the UK and US. People are still looking to business to solve some of society’s key issues and this is the opportunity for brands to stand out, deepen connections with employees and consumers and demonstrate how their operations, behaviours, products and services are providing value, alongside quality and price.
 
·       The lessons from previous global crises, such as the 2008 financial crash, have shown us that companies which continue to focus on delivering strong messages about their purpose and story perform better when the economy recovers. Incorporating ESG into your brand and communications demonstrates a positivity for the future, inspires confidence and can help build trust.
 

Two sides of the same coin


ESG is evolving at pace. Keeping up with this and driving a robust ESG agenda requires a new mindset. Leaders need to evolve and integrate their businesses to ensure financial performance and performance from a social, environmental and governance perspective become synchronized. Two sides of the same coin.


The best companies will be those which perform well in both areas and manage the delicate profit with purpose balance that enables this, something we hope will lead to an increasing alignment of interests and incentives.


Over time, this will emerge into formal reporting and comprehensive management targets. ESG metrics will need to be part of a company’s strategic priorities, which are then reinforced by incentives and communicated clearly to ensure the principles are engrained into core business and culture.


For now, it will be a gradual journey with bumps and bruises. Companies that continue to focus on ESG – alongside profitability – will disproportionally benefit and emerge as more competitive and stronger in the long run.


ESG is not going to go away. Businesses need to hold their nerve in the face of current uncertainty. If you do so, we believe your bottom line, the markets and your employees and customers will thank you for it too.



If you would like to find out more about our views on ESG, the case for responsible business and how we can help you develop and communicate your organisation’s agenda, please contact:


Debra Sobel, CEO, Verity London at debra.sobel@veritylondon.co.uk

Ben Lazarus, Partner, PwC Israel at ben.lazarus@pwc.com

 
*Sustainability Sentiment Tracker 2022 – Brodie / Public First
 

Debra Sobel
Co-founder and CEO

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