January 9, 2020
This post is the second in a series intended to help Sustainability-Responsible Executives (SRE) (e.g. Sustainability Managers, General Counsel, or a designated operative executive) tasked with exploring how a company can move to high Environmental, Social, and Governance (ESG) performance and how they might elevate their programs from low / no-budget, middle management-driven, disparate initiatives to an integrated, material, shareholder value-adding strategy that advances the purpose of the company and wins active CEO support.
Just over a year ago, we wrote on this blog that ESG Performance Is Now a Mainstream Driver for Shareholder Value. The evidence highlighted in that post, focused on how environmental, social, and governance (ESG) performance has improved shareholder returns, which helps explain why 1 in every 4 professionally managed dollars in the US is now tied to ESG performance.1 That remarkable market share emanates in part from a transformation of ESG performance among leading companies from, in the first half of the last decade, a “traditional focus on efficiency, cost, and supply chain risk,” to, in the second half of the last decade, a “market driver with the potential to grow profits and present opportunities for value creation.”2 Our post’s overarching conclusions included:
Over the ensuing year of 2019, further evidence only serves to bring all three conclusions into brighter focus. I will cite just five findings reported from Bank of America Merrill Lynch’s 2019 Global Wealth and Investment Management survey, which highlights the “top 10 reasons investors and companies should care about ESG investing”3:
Consequently, the move of ESG investing thesis from an esoteric, largely philanthropic strategy to a mainstream investment strategy has been completed and operating teams across industries and geographies are responding. In 2019, leading companies organized disparate Environmental, Social, and Governance efforts into a Board- and Investor-resonate ESG strategy. Many were able to do this through strategies that leveraged the investment they were already making in more efficient operations, corporate social responsibility (CSR) and employee diversity and engagement efforts. However, by creating an integrated ESG strategy, they are going further and aligning those efforts with the CEO’s Corporate Mission and positioning strategy.
SR Inc Member-Client Nasdaq, which is one of the world’s leading stock exchanges, provides an example of this move to operationalize high ESG performance. Nasdaq has demonstrated this move both in its own operations and in how it seeks to help listed companies advance towards high ESG performance. In one important effort, Nasdaq’s Corporate Sustainability Leader Evan Harvey took the initiative to produce and integrate what SR Inc sees as best practice guidance in the ESG Reporting Guidance 2.0 released in May of 2019. Therein, Nasdaq was careful to note that the materiality of ESG items is critical and must be independently determined by each operating company to advance its particular strategy. Moreover, Nasdaq made clear the guidance provided was not required by mandate or practice to be effectively listed on their exchange. Nonetheless, working with companies leading in ESG high-performance, Nasdaq iterated this Guidebook to define 10 items within each ESG dimension that most companies will likely want to report on to help drive recognition of their high ESG performance:
It has become clear that CEOs, C-Suite executives, and BODs should take ownership (as many already have) of what has become a visible driver of shareholder performance. However, without a clear signal from Senior Management, middle management SREs can be reluctant to take the initiative to propose how to evolve the companies’ ESG efforts through a larger business case focused not (only) on cost savings but on increasing enterprise value. This is understandable, as conventional C-Suite focus has been mostly on core business quarterly earnings, and ESG – because it impacts the enterprise’s relationship to the environmental, social, and governance context it operates in – can seem external to an enterprise’s core value creation.
But this, of course, misses the commercial value of operationalizing high ESG performance, which today is being recognized as a signal of more likely sustained future earnings. That is what the academic, operating, and market evidence is telling us – and that is obviously the responsibility of the CEO, C-Suite, and BOD. As ESG is not a CEO or C-Suite executive’s core competency, for most, not seeing that connection to-date has led to the common practice of relegating to middle managers (the “G”) the “E” and “S” performance that dominated the past decade. However, in 2020, it is stakeholder perceptions of a company’s responsible management that starts to hit much closer to the mark for impacting earnings. In fact, those stakeholder perceptions can directly impact a company’s futures earnings, and do so in the near term, in the form of talent wars, Fortune 500 customer requirements, High Net Worth, Female, Millennial, and Gen Z customer preferences, and investor evaluations of those future impacts (future risk estimations increase the cost of capital now). Now, while the above could well have been dismissed as conjecture at the turn of the last decade, and frankly maybe even just five years ago, today, in 2020, it is patently staring CEOs and BODs right in the face. And those who still cannot see it, and do not change gears fairly quickly (next 1-2 years) to address their ESG performance within this accelerating megatrend, are beginning to look like the proverbial “frog in the boiling water.”
In addition to the market stakeholder data pointing to the ESG business case, the even better news for SREs is that “changing gears” is relatively easy. It is far easier than changing business strategy, which is required commonly from CEOs and their C-Suite teams in their companies’ core businesses to achieve competitive advantage and sustained earning growth. Now that is hard to do without any guarantee of success. Conversely, achieving respected, and even leading, high ESG performance is regularly achievable in a fairly short timeframe (2-5 years). Doing so is collaborative, not competitive, the pathway and options have become fairly clear today, and significantly, success is directly in the company’s control. In fact, we have witnessed directly over a dozen years, through the privilege we have had to assist over 80 corporations on a multiple-year basis, the trend of the opportunity for SREs as they help lead on elevating the ESG ownership right up to the C-Suite, CEO, and ultimately BOD. As a bonus, given market conditions today, lifting ESG performance can even generate material positive cash flow in Year 1 on top of the more important improved reputation and deepened engagement with talent, customers, and investors.
In our next installment, we will report further on how our Member-Clients are advancing their ESG strategies. In the interim, as an example of how companies advance ESG, while generating positive cash flow, we offer to SREs Charting a Path to Net Zero Emissions which includes case studies on how two of our member-clients, Akamai and Intuit, have profitably advanced the “E” performance that goes hand-in-hand with their achieving CEO-approval and support for an overall leading ESG strategy.
1 US SIF. 2018. Report on US Sustainable, Responsible and Impact Investing Trends. https://www.ussif.org/files/Trends/Trends%202018%20executive%20summary%20FINAL.pdf
2 PwC. 2010. “Green products: Using sustainable attributes to drive growth and value Sustainable business solutions.” https://www.pwc.com/us/en/corporate-sustainability-climate-change/assets/green-products-paper.pdf
3 Bank of America Merrill Lynch. 2019. “10 Reasons You Should Care About ESG.” https://www.bofaml.com/content/dam/boamlimages/documents/articles/ID19_1119/esg_matters.pdf
David Osborn is an accomplished corporate sustainability advisor serving dozens of SR Inc’s Fortune 500 and mid-sized client companies as they drive significant operational efficiencies and better align with talent, customers, investors, and regulators through corporate sustainability strategy. From his career in business consulting and executive leadership, David brings to SR Inc over 25 years of experience in building professional services and technology-driven businesses serving a broad range of client industries. David graduated from Dartmouth College with multiple academic honors highlighted by a citation in mathematics from the then college President John G. Kemeny. David also graduated from Northwestern’s Kellogg Graduate School of Management with honors, a member of the Beta Gamma Sigma Honor Society and in the top 3% of his class.
After receiving his MBA, David cut his teeth at Bain & Company in their Boston office and then progressed up to Managing Partner at Booz, Allen & Hamilton (BAH) where he was ultimately elected by his Partners to head their Australasian business. After helping to grow that business from a very early stage to a staff of more than 100, David returned to the US to head BAH’s Retail Financial Services practice in North America. After a few years back in the US market, David transitioned to serve as Managing Partner / EVP at two innovative business service companies: the first a 150 employee, VC-backed innovative technology services provider in Boston, and the second a high-end, 200+ employee proprietary marketing services provider located in Princeton and New York. In both companies, David led over 200% growth within 2-3 years while substantially building the companies’ delivery teams, capabilities, and shareholder value.
