In September 2022, Yvon Chouinard gave his company to the Earth. Chouinard, the founder of the outdoor brand Patagonia, announced that he would reorganize the company, divide its stock between a trust and an operating collective, and distribute profits to the fight against climate change. “Earth is now our only stakeholder,” Chouinard wrote.
Chouinard’s declaration marked a revolutionary moment for the ESG movement. For years Patagonia has donated 1 percent of its annual profits to environmental nonprofits. But this decision raised Patagonia’s commitment, pivoting its employees, stakeholders, and products around one common goal. “We’re in business to save our home planet,” Chouinard said. It also raised the ESG bar for every company, from startup to multinational.
ESG — an acronym for environmental, social, and governance — has become vital to C-suites, board rooms, the workforce, and capital markets. Companies have made ESG criteria part of their daily operations to reduce resource use, contribute to their communities, and conduct themselves ethically and transparently. Concurrently, more investors are choosing to finance, or buy stock in, companies that do good while doing business.
Research has shown that companies benefit from sound ESG policies. According to the Harvard Business Review, companies with solid ESG platforms outperformed others during the financial downturn of the pandemic’s early months in 2020. A 2015 University of Oxford study found that investment in sustainability lowers capital costs, results in better performance, and benefits stock prices.
Though some companies faced ESG challenges in 2022 — the Russia-Ukraine conflict, its resulting energy shortage, and global inflation — they moved forward with long-term purpose. By implementing and sustaining ESG into their business protocols, leaders are building stronger, more sustainable brands in an economy that values them.
What’s (New With) ESG?
First, let’s delineate between ESG initiatives and ESG investing, which often get tangled. ESG is a framework that companies employ to integrate sustainable practices into their operations. ESG investing entails how investors consider a company’s sustainability and social practices before giving them money.
The two concepts should be viewed separately — and outside the political lens that has framed some ESG discussions. Companies should apply ESG policies to address these and other issues:
- Environmental: Lowering carbon emissions, using water and energy resourcefully, reducing packaging and waste
- Social: Helping local communities, advancing DEI initiatives, protecting data
- Governance: Building diverse boards, eliminating wage gaps, being transparent about executive compensation
ESG isn’t a new concept. Companies have defined purpose beyond profit for decades. But in the last decade, notably after the financial crisis of 2008, companies began adopting stronger policies regarding sustainability, society, and stewardship.
Today, ESG reporting and oversight are gaining importance. More than 120 companies are disclosing their stakeholder capitalism metrics as part of a World Economic Forum plan. In some cases, ESG disclosures are moving from voluntary to mandatory.
The European Union requires large companies to report on the “social and environmental impacts of their activities.” In the U.S., the Securities and Exchange Commission has proposed rules requiring companies to make “climate-related disclosures” available to investors. Bloomberg Law expects the SEC to adopt its policy in 2022.
The Benefits of ESG
ESG can generate many competitive advantages. By administering and tracking sustainable practices, companies can learn more about how they use energy, make products, and manage waste. They can learn about supplier procedures, creating a more sustainable product chain. This improves efficiency, reduces exposure to environmental fines, and increases innovation. ESG also can build trust. Government regulators who trust companies are more likely to reward them with contracts, licenses, and bid approvals.
ESG can yield new customers. According to a 2021 Deloitte survey, 49 percent of leaders say their sustainability actions have impacted customer relationships positively. A 2021 IBM survey found that 84 percent of consumers consider environmental responsibility either moderately or extremely important when choosing a brand, up from 77 percent in 2019. Another survey found that 85 percent of consumers have made sustainability more of a buying consideration over the past five years.
Further, ESG can attract and retain top talent. In the Deloitte survey, 46 percent of leaders said their sustainability efforts advanced employee recruitment and retention. The IBM survey found that employees, particularly Millennials and those in Generation Z, value “purpose-driven employment.” More than 70 percent of respondents said they were more likely to apply to, and accept jobs from, socially responsible firms. Nearly 50 percent said they would consider accepting lower salaries from socially and environmentally responsible companies.
How to Become ESG Proactive
In some companies, the role of Chief Purpose Officer is taking hold. The CPO not only upholds the mission and values within a company but also extends them to the community. For companies unable to hire CPOs, McKinsey offers ESG actions any organization can take.
Identify Your ‘Superpowers’
What makes your company unique, and how does that uniqueness fit into an ESG strategy? For example, buying ethically sourced coffee beans matters to a coffee shop. It matters less to an accounting firm.
Pursue ESG initiatives that amplify a company’s core business. Walmart, a retail superpower, launched Project Gigaton to cut greenhouse gas emissions by one billion metric tons by 2030. Hilton, a travel superpower, created the “Travel With Purpose” initiative to reduce the environmental impact of its properties and promote travel to diverse locations.
Consider High Jumps and Long Jumps
Companies can have different levels of ESG commitment. Some might take smaller steps (offer reusable materials, volunteer in the community, etc.) while others expand their efforts to create a comprehensive ESG policy. Companies should start where they’re comfortable and expand ESG initiatives when possible.
That’s the high jump. Companies then can take the long jump toward becoming industry leaders. Rocket Mortgage, Detroit’s largest employer, has committed to a $500 million community investment over the next decade. It also created a neighborhood program to provide more housing and financing resources for Detroit residents. IKEA’s environmental measures include sourcing sustainable cotton, using only renewable or recycled plastic, and offering a meatless version of its popular meatball.
Follow Through to Ensure Impact
ESG initiatives are valuable only when companies take them seriously. Patagonia certainly does. Organizations don’t have to take that approach but should follow their initiatives with action.
Reporting progress represents one measure. Many companies provide public dashboards to track their ESG impacts. Hilton’s is notable. Inside the C-suite, executives are having their compensation related to ESG. Thomson Reuters reports that some large public companies are tying 5–15 percent of executive pay to ESG initiatives. The idea is “gaining a lot of traction largely because investors have been pushing,” an ESG expert said.
ESG is a mission, not a destination, and every organization’s ESG journey is different, but by demonstrating more commitment to sustainable practices and social responsibility, we all can join Patagonia’s Yvon Chouinard call to save our home.