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ESG is everywhere right now – but what does it all mean? In this week’s video blog conversation, Candice, Janet and Josh break down the ESG basics, why every company should pay attention to their impact strategy and one way any business can get started.

Whether you’re an ESG novice or someone thinking about impact all day long – we think there is something in this conversation for everyone!

Looking to learn more about ESG, check out our other ESG posts:

• CSR vs. ESG: The Evolving World of Corporate Social Impact
• Translating ESG and Social Impact for Manufacturing Companies
• The Changing Tide of Impact Partnerships
• Is There Really a Corporate Naughty List?
• Four ESG Trends You Have to Watch
• What Movement Are You Leading?
• ESG & The Rise of the External ‘S’
• Why Every Company Needs a Theory of Impact

We need your help!

In 2021, Next Stage published The Social Good Report: Profit & Purpose, a study of the ways companies and nonprofits are intersecting around social impact. In the eighteen months since we completed our research, corporate social impact has changed significantly, including the rapid rise of ESG. This fall, we plan to publish an addendum to the original report that covers these changes – and we need your help! We want to hear from business, ESG, CSR and nonprofit leaders on this one question:

In the last year, what has changed about your company’s approach to ESG and community impact? You can respond here!

How does your business determine how to make social impact investments? There is no single way that companies choose to express the public-facing ‘S’ in their ESG strategy. Some companies choose to align around a particular cause or passion. Others largely leave it up to CSR officers or the marketing & PR department who collaborate with nonprofit leaders to form longer-term partnerships. Still others have no strategy at all, making charitable donations to whatever feels right.

In Josh’s blog post last week, he noted that the ‘External S’ is the next frontier of corporate impact – a chance for companies to build custom expressions of their purpose and reimagine community relationships that will yield mutual benefit. And as Josh noted, “We believe that activating the people power of a company – the very customers, employees and shareholders that are driving the ESG shift to begin with – is a big part of how companies will be evaluated in the future. Transactional social impact activities are shifting to more meaningful and strategic expressions of commitment to causes.”

This sounds great – but we know the challenges of reimagining a social impact strategy can feel overwhelming on a good day. This is why we believe that every company needs a Theory of Impact.  

What is a theory of impact? 

For years, nonprofit organizations have built ‘theories of change’ to help illustrate the way their interventions and programs will achieve their vision, leading to long-term community impact. It is an important exercise, helping to clarify an organization’s value proposition, while ensuring that programs and activities are all designed to support an intended impact.

As our team has worked with more and more corporate clients over the last year, it is a construct that we are finding equally helpful in the private sector. We’ve worked with several companies to better define their impact, align internal employee engagement with external social activities and launch pilot projects designed to demonstrate measurable impact. In every single case, starting with a Theory of Impact was critical to a successful project.

It aligns impact with your company’s purpose. 

Rather than staking impact efforts on ‘corporate charity,’ developing a Theory of Impact ensures that your company’s social impact strategy becomes an expression of your overall purpose. Many companies can name their corporate purpose – but when it comes to their ‘External S’ – their social impact – it is often disconnected.

The light bulb moment for many companies happens when the two are aligned. Initially, some companies balk at this notion. Shouldn’t charitable efforts be motivated by altruism rather than benefit? We don’t think so.

When External S efforts are aligned with a company’s own goals and superpowers, that’s where the magic happens. This can look like identifying a challenge – a sluggish workforce pipeline, a need for local name recognition or the desire to see a thriving, economically mobile community that will help business thrive.

One recent financial company we worked with found traction when they connected economic mobility with their own desire to help people confidently invest. They built a Theory of Impact that focused on helping students achieve the financial resources needed to attend and persist through higher education using a range of programs that leveraged their own resources. This framed their educational efforts in a whole new light and enabled their team to create targeted, measurable programs connected to their own purpose.

It balances risk and opportunity.

A Theory of Impact can also help mitigate risk, turning exposure into opportunity. ESG measures have traditionally been 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? For example, many companies are seeking to diversify their supply chain while also also examining where vendors may have potential areas of exposed risk.

A thoughtfully designed Theory of Impact can turn these risks into opportunity, taking areas of exposure and mitigating them with genuine community impact. When companies tap into their own materiality – areas of exposure that are surfaced as a function of their own business processes – they can discover authentic ways to express an external social impact that makes sense for them to advance. In this way, it is natural for a real estate developer to care about affordable housing and gentrification, just as a mortgage lender would focus on first-time homebuyers or a law firm would consider pro bono casework.

Whatever your company’s inherent business risks, external social impact efforts can be custom-designed to help mitigate these risks while supporting related community needs.

How is Next Stage supporting companies developing their own Theory of Impact? 

The benefits of a defined Theory of Impact are wide-reaching and significant. When done well, aligning impact with your business purpose and practices becomes the opposite of a traditional ‘feel good investment.’ Instead it helps turn risks into opportunities, engages employees, creates strong community brand recognition and best of all – builds opportunity and success within a community.

Our team has a strong background in the ways practices and programs knit together impact in a community. We launched our Impact for Business service line with the goal of partnering with companies to ‘work at the intersection of social good.’ As outlined in Profit & Purpose, there are many bottom-line serving ways that embracing ESG – and a Theory of Impact – can translate into increased brand visibility, employee retention and yes, increased profitability.

Next Stage can work with your company to identify ways social impact can help address some of your biggest business challenges, building a Theory of Impact that both mitigates risk and addresses some of your community’s biggest needs.

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.

What’s Next? is back! Our team is so excited to roll out season two of our online roundtable where we talk to corporate and nonprofit changemakers who are partnering in innovative ways to fuel social good. This week, Josh and I are back with a season intro.

As we mention in the video, it has been nearly a year since the publication of the Profit & Purpose report and the amount of changes that have happened in the social good space this year are staggering! We believe that there is a major paradigm shift happening and that the pace of these changes are going to continue at a rapid pace (Josh will talk about this paradigm shift in next week’s blog, so stay tuned!).

In the meantime, we’re talking about four trends that we’re seeing in the social good sector. For Next Stage, the last eleven months have brought their own kind of paradigm shift. In addition to the incredible work that we continue to do with nonprofits, we’ve begun working with private sector businesses to build out their own social impact work. The trends we’re seeing have major implications for private sector businesses and nonprofits alike.

The Rise of ESG

When we published Profit & Purpose in May 2021, we used the word ESG exactly five times – and all five were in the Sustainability section. One year later we’re seeing ‘ESG’ everywhere, across a range of social good contexts. We’ve talked about the rise of ESG on the blog before – the acronym stands for Environmental, Social, Governance. ESG typically has a large scope that includes the environmental impact of the company’s operations, social impacts both charitable and through the lens of its day-to-day activities and governance, including internal controls, representative leadership and shareholder rights.

What to Watch: ESG isn’t a construct that’s going away anytime soon. In fact, we anticipate even more conversation about company efforts and how their social strategies are fitting in with the larger ESG picture.

A Focus on the ‘S’

Now that ESG is a construct that companies are embracing, the ‘S’ is taking its place in a larger narrative. Environmental and governance – the ‘E’ and ‘G’ parts of ESG have been on private sector minds for a while now and in many cases have defined measurements and strategies. But Social – the ‘S’ in ESG – is forcing companies to think about impact in ways they haven’t before.

Next Stage has recently begun working with several private sector clients to establish a Theory of Change, a way of thinking previously embraced primarily by nonprofits. This method helps organizations map out the challenges they want to help address, the resources they can provide and the expected impact they hope to achieve. It has been an ‘aha’ moment for our own team. Clarifying this theory of change has helped more clearly map a company’s overall strategy and align it with the business’ own values and goals. It also helps employees understand the impact that company hopes to make and how to engage with those efforts.

What to Watch: Over the next year we anticipate this trend to only increase. Expect to hear a lot more businesses defining their social strategy and aligning those efforts with their brand.

The Shift for CSR Leaders

After another year of rapid social change, many CSR leaders find themselves in a strange place. Companies are placing more importance on social good than ever before. In fact, companies like Chipotle and Salesforce are even tying portions of their executive compensation to ESG goals. A lot is expected of CSR leaders today and many find themselves at new tables within the company. These roles are being pulled into conversations not only about impact, but about overall ESG efforts, DEI and more.

But while many CSR leaders face increased responsibilities, the investment into these goals often lags. They are part of more conversations, but in most cases have not been given additional decision-making power and are limited in their ability to be an agent of change within the company.

What to Watch: We expect to see this change over the coming years, as the ‘S’ continues to increase in importance. Look for larger teams, repositioning of those teams within companies and even ‘Chief Impact Officers’ to start emerging as companies build more robust social strategies.

An Eye on Measurement

With the increased focus on the Social part of ESG comes an increased focus on how to measure impact. Environmental and governance have metrics that are already clearly defined. While they aren’t necessarily easy to measure, companies largely use the same set of metrics, such as carbon footprint or emissions. When it comes to ‘S,’ these metrics are almost entirely undefined – and different for every company.

Because every company focuses on a different set of impact issues, impact measurement can look drastically different from company to company. And since social efforts can also impact companies internally, there are both internal and external metrics to consider. For example – if a company is focused on education issues, they may choose to track how their efforts are helping kids gain access to college. Internally, they may want to track volunteer hours or the impact of those volunteer hours on employee engagement. In every case, these metrics are harder to define because they aren’t clear cut in every organization and they require significant collaboration with nonprofit organizations.

What to Watch: We expect to hear a lot more about this over the coming year, as companies further define their social impact strategies. Savvy companies will partner even more closely with their funded organizations and may include the support of academic institutions to create methodology that better defines the effectiveness of their social investments.

Check out the episode, where we discuss these trends in more detail – and let us know what you expect to see this year in ESG!

Last Friday, the Next Stage team got to spend the day in a film studio, capturing some incredible conversations for Season Two of What’s Next?, our video roundtable that explores innovative partnerships between nonprofit and corporate changemakers. And wow – we feel lucky. Nearly a year out from the publication of Profit & Purpose, we got to spend an entire day talking to partners that are forging new paths for social good partnerships.

Since the launch of Profit & Purpose, we’ve also had the privilege to work alongside several companies as they build out their own impact strategies. In just the last few weeks we’ve sat in several conference and Zoom rooms with nonprofit, public and private sector leaders as they map out their partnerships and collaborate on shared outcomes.

I’ve sat in a lot of sponsorship conversations throughout my career on both the nonprofit and private sector sides of the table. But y’all – these conversations felt different.

These partnerships have the hallmarks of so many of the trends we’re seeing in the corporate impact space right now. Collaborative planning, multi-year funding commitments and focus on hyper-local causes are becoming more and more common among companies we interview and work with. We think this is for several reasons.

A Changing Dynamic
First, the disruption of the last two years has pushed for greater innovation. There is a growing realization that no single entity – nonprofit, corporate, government or civic – can create systemic change on their own, so it becomes essential to work together. This creates an environment where each organization is more acutely aware of their own needs, as well as the strengths of their partners.

Second, quickly evolving ESG demands are encouraging companies to think about impact in ways they hadn’t previously needed to consider. This focus on the ‘S’ or Social component is prompting companies to think in ways that are traditionally occupied by nonprofits. We are currently seeing a greater sharing of expertise between partners, as nonprofits and companies learn that sharing expertise, data and outcomes offer benefits that have previously gone unexplored.

A Different Conversation
The partnership meetings we attended over the last few weeks were honest and engaging. People left the room feeling energized. After our team left our third meeting room buzzing with excitement, we realized that it wasn’t the projects itself that were so exciting (although the partnerships themselves are innovative and energizing!). It was the conversation itself that felt different.

We think this ‘new’ way of partnership is changing the dynamic between nonprofit and private sector partners. In Profit & Purpose, we noted that transactional sponsorships are dying to a more dynamic, collaborative kind of relationship and these conversations were evidence of that shift. Here are three ways we see this dynamic changing the tone and the power dynamic:

It encourages honest conversation. There is an openness to conversation that happens when nonprofits and companies come to the table as co-collaborators instead of funder/fund-ee. Rather than conversation about transactional sponsorship grids or expectations around outcomes, we saw a free exchange of ideas and information. In one case, the company asked a room of grant recipients for their opinion on their impact theory – and really listened to the feedback. In another case, a nonprofit was able to request a different type of support – access to data and a connection that the CSR professional didn’t even realize was needed.

It enables creativity. One nonprofit leader noted the freedom that came with this style of partnership. Rather than requesting a set of outcomes before the project even started, co-collaboration meant that the partners defined possible outcomes together – and noted that these may shift throughout the project. Traditionally, funders have held nonprofits to strict reporting and outcomes. And while accountability is important, so is innovation. A long-term, collaborative partnership means that both parties can adopt a ‘fail faster’ mentality that is more responsive to the needs of communities and better equipped for results.

It leverages resources. In this type of partnership, both sides have valuable resources – data, expertise, network, stakeholders and more. This type of collaboration allows each side to authentically access those resources and work together. In one meeting last week, a group of nonprofits and a company discussed what it would look like to share data, how the company could help them interpret that data and the shared narrative and outcomes that could be driven by collaboration. In another meeting, educational nonprofit leaders shared leadership goals and considered what cross-training opportunities may be available that would improve employee engagement for both parties.

These conversations were only the beginning of many of these partnerships, but the mutuality and kinship present were refreshing and promising for the success of these collaborations. In the meantime, I’m feeling extra grateful for the energy present in so many of these rooms and the work we get to do every day.