By Josh Jacobson
“The only constant in life is change.” – Heraclitus, Greek Philosopher
As a whole, people don’t typically like change. We might understand the need for change – heck, we might even be on the frontlines advocating strongly for change. But when it comes time to actually modify behavior, to change practice, that’s where the rubber really hits the road.
This is the space we are finding many private sector companies as they wrestle with increased expectations for ethical, values-aligned business models that reflect positive social and environmental impact.
When we published The Social Good Report: Profit & Purpose last year, we had spent the better part of a year exploring how the private sector was tackling these increased expectations. We sought to detail a new approach to social impact for businesses, and through more than 80 interviews, we feel strongly that we have developed an effective roadmap for the community. And in the months since we went live with the report, we have learned so much more.
In the fall of 2021, Next Stage launched its Social Impact for Business service line – an opportunity for companies to engage Next Stage to apply the concepts outlined in Profit & Purpose. We inked our first contracts soon after and have been broadening our understanding and refining our services.
We now understand better than ever what a “Wild West” this trendline has become, with companies and nonprofits alike publicly acknowledging the shifting ground upon which they stand but expressing uncertainty with how best to proceed. It is clear much has changed but what is it changing into? This is the question we aim to continue unpacking on behalf of the Charlotte community and beyond.
To understand this trendline is to explore how vocabulary is changing.
What is CSR and ESG?
CSR stands for “corporate social responsibility,” a concept that suggests private sector companies have an ethical responsibility to improve the communities in which they operate. Most public companies and some private companies have formal CSR strategies that most prominently include how a percentage of revenue is invested back into community. Companies may feature a CSR executive who is charged with managing these strategies, or that may be one task of a professional with a broader scope of responsibilities.
ESG stands for “Environmental, Social and Governance.” According to Investopedia, it describes criteria that serve as “a set of standards for a company’s operations that socially conscious investors use to screen potential investments.” ESG typically has a large scope including the environmental impact of the company’s operations (including its supply chain), social impacts both charitable and through the lens of its day-to-day activities, and governance including internal controls, representative leadership and shareholder rights.
So ESG isn’t just another term for CSR? What is driving the shift from CSR to ESG?
While some have suggested ESG is the new expression of CSR, Next Stage believes it is actually a major evolution of the concept to something far more powerful. And much of it is tied to generational change.
As noted by the Association of Corporate Citizenship Professionals, CSR got its start in the late 19th and early 20th centuries with successful tycoons like Andrew Carnegie and John D. Rockefeller expressing a responsibility to give back to society. In the latter half of the 20th century, CSR began to gather steam as consumer buying decisions became influenced by cause marketing. By the early 2000’s, increased expectations by a younger workforce brought CSR strategies into the workplace as volunteerism and employee engagement became a more common human resource strategy.
The big disruptive shift has come more recently as the private sector manages the increased expectations of shareholders. Socially responsible investing has existed for decades but has been significantly reactivated through Millennial and Gen-Z generations choosing socially responsible mutual funds for retirement investments. As noted by MSCI in their 2020 whitepaper, a recent survey noted that “87% of high net worth millennials considered a company’s ESG track record an important consideration in their decision about whether to invest in it or not.”
While previous CSR efforts translated into cause marketing impacting consumer preference and employee engagement practices to increase employee retention, ESG is focused on shifts to investment that have the potential to dramatically impact the bottom line for companies. To put it another way, the Millennial who grew up believing cause marketing messages became an employee who expected those values in their workplace. And now, they are “changing the game” once again through their investments.
I guess ESG is mostly something for publicly traded companies to worry about?
No. In our recent work, we have partnered with large corporations and private, family-owned businesses alike. Our learnings are that socially responsible investing is having an expansive impact on many different types of businesses.
ESG is currently centered in more of a framework of risk – what potential downside risks does a company have based on environmental, social and governance impacts of its business model. One area where companies are focusing is on the supply chain where a company’s vendors (and the vendors to those vendors) are potential areas of exposed risk. Many companies are seeking to diversify their supply chains while also examining how those vendors create ESG risk. Companies that do business with publicly-traded companies (or are vendors to the companies that do) may find themselves just as exposed.
The definition of stakeholder is also changing for many companies. Since investor impact is really a function of the will of the people, elected officials are also monitoring how the underpinnings of ESG impact the voting habits of their constituencies. The leadership of local municipalities like the Charlotte City Council have demonstrated a desire to see increased social responsibility from companies of all sizes.
In this way, we believe ESG is like a snowball rolling down a hill. It is a trend that will eventually impact every private sector company.
How is Next Stage supporting this shift?
We entered this space having focused on the role nonprofits play in communities through the often-messy framework of community ownership – nonprofits are a public framework “owned by the people” and must knit together many different constituencies to achieve success. Our skillset of building coalition is ideally aligned to the needs of companies that find themselves suddenly needing to build buy-in from more constituencies than ever before.
We launched our Social Impact for Business service line with the goal of partnering with companies to “work at the intersection of social good.” Whereas many companies are seeing these shifts through a lens of risk, Next Stage aims to reframe it as “corporate social opportunity.” As outlined in Profit & Purpose, there are many bottom-line serving ways that an embrace of ESG criteria can translate into increased brand visibility, employee retention and, yes, increased profitability.
With this in mind, Next Stage is tackling many ways this is being expressed:
- As the leaders of privately-held businesses prepare for an IPO or get ahead of industry accountability protocols, we are engaging in formal planning and implementation engagements to create values-aligned ESG processes. We call this service line Social Impact for Business.
- Companies with staff leaders of CSR, DEI and Sustainability are wrestling with how to link these efforts to create an integrated approach to ESG. We are pioneering new models and seeking to lead area corporations through change.
- Private sector leaders are seeking partnerships with nonprofits that can help them navigate increased expectations for engagement while also assisting in measuring impact. We have built the Nonprofit Partnership Platform to do exactly that.
ESG may be disrupting the status quo but we believe it can be harnessed to leverage the win-win-win potential hidden in every company. Want to learn more? Reach out for a free consultation.