Your customers, clients, vendors, employees and shareholders expect more from you today than ever before, regardless of your business or industry. The latest metric is where you stand on environmental, social and governance (ESG) issues. In simple terms, how does your company treat their people and the environment, and what do you stand for.
And if you think ESG is just a passing trend, consider that BlackRock calls these changing attitudes a “tectonic shift.” Presently, the total valuation of ESG assets is around USD30 trillion. That’s more than 25% of the managed assets in the entire market.
That percentage will increase as we experience a massive transfer of wealth called ‘The Great Wealth Migration.’ This migration is USD68 trillion transferring to future generations, and they consume and invest completely differently than baby boomers. Only 22% of boomers express interest in impact investing. For Gen X, it’s 31%. And 71% of millennials report interest in investing in impact-minded corporations.
Walmart recently responded to this massive change by not just setting to be carbon neutral by 2040, but by declaring that it is aiming to be a “restorative” company, actively pledging to protect, manage or restore at least 50 million acres of land and 1 million square miles of ocean by 2030.
In just 2020 alone, more than 1,500 companies announced goals to become carbon neutral, three times as many as in 2019. There are now 2,706 sustainable funds available that meet ESG criteria, and inflows to ESG funds rose by 72% in Q2 of 2020.
It’s abundantly clear that what I call ‘elevated economics’ is here to stay. My fellow YPO member, Drew Fraser, CEO of Method Products, says, “The old way of doing business is already dead.” But the good news is, being a business that does good, is good for business.
Good sustainable practices are a magnet for customers as well, as they want to align themselves with businesses that reflect their values. So, if sustainability once seemed like a hobby, many companies now view it as mission critical.
But how can companies and business leaders make sure they stay ahead of this shift? Focus on three key factors.
Audit to adapt
Before a company can set out to make ESG changes, leadership must first take an inventory of where the company stands on each of these issues. Success in the ‘elevated economy’ won’t come to the firms that fight it, but rather to the ones that adapt to it. To do this, answer three vital questions:
- Where does your company stand on environmental issues and how can you become a leader? Consider how your firm works to protect and conserve the natural environment:
- Air emissions and air quality
- Energy use and conservation
- Natural resources and land use
- Waste management and water quality
- Hazardous materials use
- Where does your company stand on social issues and how can you become a leader? Consider your relationships with employees, suppliers, clients and the communities in which you operate:
- Labor standards and employee relations
- Production quality and safety
- Equal employment opportunities
- Health care, education and housing services
- Local community impact
- Where does your company stand on governance issues and how can you become a leader? Consider the standards you have for leadership, for risk controls and for shareholder rights:
- Ethical business practices
- Board independence and diversity
- Executive pay versus employee pay
- Accounting and tax transparency
- Voting rights
Having responses to these questions will help clarify your business’s core beliefs, which will prepare you to act on the second key factor in leveraging ESG to your benefit.
Have a purpose and act on it
As a business leader, you are facing a brave new world, a world where consumers have begun to do the one thing that the capitalists of the last 150 years feared: care. There is a new ‘P’ to the classic four ‘P’s’ of marketing: product, price, place and promotion. YPO member Bianca Gates, CEO of Birdies, eloquently articulated this: Consumers care about the new “P” of business that is a result of today’s informed, connected, and imperiled consumer class: purpose. Your clients and customers now make purchases that reflect their personal values.
Let’s look at the issue of climate change alone. Nearly half (48%) of U.S. consumers say they would definitely or probably change their consumption habits to reduce their impact on the environment. Blackrock CEO Larry Fink said recently, “To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.”
There is a new ‘P’ to the classic four ‘P’s’ of marketing: product, price, place and promotion —and that’s PURPOSE. ”
— Richard Steel, Entrepreneur, Investor & Author share
A company’s purpose must benefit all its stakeholders, including shareholders, employees, customers and the communities in which they operate. Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings and, in the process, sacrifice investments in employee development, innovation and capital expenditures that are necessary for long-term growth.
Ask yourself, what is your company’s purpose, and what does it look like in action?
A renewed focus on employees
My research shows that a renewed focus on employees and their passion for ESG issues increases the overall success of a business in dramatic fashion. The Society for Human Resource Management says that the average cost to replace a salaried employee is 6-9 months of salary. For executive-level employees, this cost can be much higher.
YPO member-led Glassdoor, one of the world’s largest job and recruiting sites, released a survey conducted by The Harris Poll measuring sentiment around mission and culture in the workplace. The survey uncovers the importance of culture and company mission to recruitment and retention and the extent to which job seekers are now looking for employers whose values align with their values.
“Having a compelling mission, culture, and values are critical when it comes to attracting and retaining top talent in a competitive job market – it is what differentiates each and every employer,” says Glassdoor President and CEO, Christian Sutherland-Wong. In the millions of reviews of companies on Glassdoor.com, the companies with a strong sense of mission and purpose outperform their peers. “Doing the right thing and shareholder returns are not in conflict,” adds Sutherland-Wong. “Companies that do good attract the best talent and connect more deeply with their customers, which is ultimately good for business.”
ESG is here to stay. Fight it at your peril or leverage it to take your company to the next level. Conduct an audit of where you stand on ESG issues and map out where you can go. Make sure your business has a well-articulated purpose and act on it. With a renewed focus on employees, who understand where you stand on the issues that they care about, you’ll soar to new heights.
This is an exciting and positive time for business. There is finally consensus on an economic model for a future we can believe in. One that exists for the good of everyone.
Let’s enjoy it together.