As Janet outlined in last week’s article about the change we’re seeing in impact partnerships, we have had a bit of a front-row seat to watching the ESG paradigm shift unfold in our community. It has been amazing to talk to so many local leaders and work now with private sector clients as they look to renew and reinvent their efforts.
But not everyone has gotten the memo. We’ve also had conversations that feel less positive, where this exciting reimagining of the role impact has in corporate America is less something to embrace and more something to fear. Whenever the first words out of someone’s mouth are “compliance” or “regulators,” we have a pretty good idea of how the rest of the conversation will go. Someone simply wanting to stay off ‘the corporate naughty list’ is not likely to embrace what we’re all about.
But is there really a corporate naughty list? And who keeps that list?
The Profound Impact of a Risk Perspective
When we published Profit & Purpose last year, we set out to share a hopeful, optimistic view of how alignment to social impact could have sizable positive impact on the bottom line for local companies. Our focus on branding and workforce felt incredibly aligned to the times we were living in, as the pandemic, a renewed fight for racial and social justice, and generational change combined to create a powerful societal shift. As we set out to engage corporate executives with it we found them… distracted.
We love our game-changing report, but we also think it missed the mark on two key topics: how ESG was rapidly becoming the conversation, and how much of that conversation was focused on risk. We were selling the features on the car when people weren’t quite sure they should even be driving in the first place.
What a difference a year makes. We are approaching the one year anniversary of Profit & Purpose next month and now those same topics – particularly employee engagement and workforce pipeline as a response to the Great Resignation – are front and center in civic discourse.
So what changed? Why has there been such a pronounced shift in the embrace of ESG in even just the last 3-6 months, and what does it mean for the future?
As a follow-up to my last article CSR vs. ESG: The Evolving World of Corporate Social Impact, we’re unpacking what ESG is and how it is changing so much about how companies operate. We’re also exploring how this will influence how social impact gets done going forward.
I keep hearing about ESG but I don’t really understand – who measures it?
The concepts of ESG have been on the minds of business leaders for some time. As noted in this brief from the Harvard Law School Forum on Corporate Governance from all the way back in 2017:
“Most international and domestic public (and many private) companies are being evaluated and rated on their environmental, social and governance (ESG) performance by various third party providers of reports and ratings. Institutional investors, asset managers, financial institutions and other stakeholders are increasingly relying on these reports and ratings to assess and measure company ESG performance over time and as compared to peers.”
Back then, entities like the Bloomberg ESG Data Service and the Dow Jones Sustainability Index aggregated information from companies either opting in to provide information, self-nominating for inclusion on top-company lists, or from information collected from publicly-accessible reports.
In the years since, the number of third-party rating agencies has grown considerably and some have pulled ahead. We will dive into a comparison of MSCI and Sustainalytics in a future post, comparing and contrasting how they evaluate ESG with a particular focus on social impact. All publicly-traded companies and many private companies now realize that engagement with these rating agencies is not an option – it is a strategic must.
The other change has been to standardizing the criteria for how companies are evaluated. Two primary standards have emerged – the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). This joint report from 2021 from both organizations does a great job of breaking down how they complement each other.
If this is whoosh over your head, suffice it to say that there are now indexes on specific areas of ESG impact, and companies are thinking about how their actions align. When we talk about ‘materiality,’ we’re talking about alignment to these standards.
I think I get it, but why does any of this matter?
Good question. It can all feel a little bit overwhelming. When was the last time your company or nonprofit contemplated how it fit in to the United Nation’s Sustainable Development Goals? It just isn’t a top-of-mind discussion for most leadership tables or board rooms.
In the wake of a global pandemic that disrupted nearly everyone on the planet, we are all feeling much closer to these topics than ever before. For example, we can now understand with maximum clarity the direct relationship between public health strategies and our bottom line at work. Access to medical care is shifting rapidly from the realm of political discourse to one of essentialness to economic sustainability. While folks may still be debating the effectiveness of masks, few in the business world would debate the importance of strong global pandemic policies or the role we all play in standing them up.
It isn’t the only topic freed from the shackles of politicization. Up until a few years ago, the climate crisis was still a topic seemingly up for debate. Local environmental nonprofits seeking funding from corporations would typically soften or avoid language altogether directly naming climate change to keep from triggering a negative response.
It makes the language opening Citi’s recently published Environmental and Social Policy Framework all the more striking:
“The climate crisis is one of the most critical challenges facing our global society and economy in the 21st century. The data is irrefutable, and the world’s climate scientists agree that urgent action must be taken to address the current and potential impacts of climate change, including chronic changes to temperature and precipitation, rising sea levels, and more intense and frequent extreme weather events.”
At some undefined milestone in the past 5-6 years, many corporations that had been largely working to avoid ‘government regulators’ in a risk-focused perspective on climate change changed their tune considerably. As we unpacked a few months ago, we think there a myriad of reasons beyond the obvious reality that our planet is suffering – consumer choice, employee preference, and perhaps most powerfully of all, shareholder demand.
This matters because private sector companies of all sizes are now realizing that they can not afford to sit out of the conversation. ‘Fighting regulation’ is an antiquated way of viewing things when the people doing the regulating are individual customers, employees and investors. Viewing these expectations against the monolith of government regulation suggests this is an us vs. them framework when really the ‘them’ in that discussion is us – the people who buy from us, who work with us, who invest in us.
A shift to that perspective is not only necessary, I’m pleased to say it is actually happening. Now. In real time. The folks in our firm and the work we are now doing is a testament to it.
How is this impacting my company or nonprofit?
We believe at Next Stage that this shift is happening so quickly and with such declarative intention, we are just a few short years away from a wholly different era. We think companies and nonprofits not leading these efforts need to catch up and quickly.
For companies, there are some amazing templates out there. Charlotte’s largest Fortune 1000 headquarter companies are all walking this walk in a variety of ways. That is not to say the path ahead will be easy. So many of these companies have hardwired silos of sustainability, diversity and inclusion, and social responsibility, and the ESG pivot is requiring greater collaboration across function areas than ever before. Our conversations with folks leading this change management suggests it will be hard for a while. We have launched a service line to help support and build capacity for these change agents who are so often leading this work with modest human resources.
As fascinating for us has been how many privately-owned companies are seeing ESG as an imperative. This is due in large part to how the supply chain of publicly-traded companies is being disrupted by increased expectations. If your biggest buyers are companies in the thick of ESG strategy, you better believe those topics are soon going to be very important to you as well. We are currently working with privately-owned companies who are smartly getting ahead of this fast-moving trendline.
Nonprofits are similarly reading the writing on the wall. It began as event sponsorships started drying up as companies told nonprofits they were rethinking those strategies. As Janet outlined last week, we have been facilitating sessions where companies and nonprofits put their cards on the table, discussing a shared framework of impact that requires greater intentionality around measurement. As we have worked with companies to design theories of change, elevating the ‘S’ in ESG into a narrative complete with custom metrics, it is increasingly nonprofits that will be called upon to activate those metrics through their own work.
Yes Virginia, There is a Corporate Naughty List
All of this is being realized because companies are shifting their perspectives, moving away from thinking of ESG as a form of risk or regulation to manage. Instead, they are seeing the incredible opportunity to be first to market with their own, differentiated strategies. And nonprofits that demonstrate savvy in relationship to this changing framework will reap the benefits of alignment.
So yes, while there is a kind of corporate naughty list out there, we think it is the wrong way to look at the ESG paradigm shift. Simply wanting to stay off such a list means that a company is not realizing the many benefits to embracing how this preference shift can be channeled to create a powerful brand, drive employee retention, build a workforce pipeline, grow sales and increase shareholder satisfaction.
In this way, we are starting to see recognition that Profit & Purpose was the exact opposite of a corporate naughty list – it was the beginning of a local nice list of impact-focused companies embracing these changes and making the most of them.
It is a list we continue to add to and look forward to highlighting in our content moving forward.
Interested in a conversation about how this might be of use to your own company or nonprofit? Get in touch and we’ll gladly setup a conversation with you.
Written by Josh Jacobson