Moving Beyond Box – Checking to Achieve Real ESG Impact
To mobilize large-scale environmental and social change, companies must understand the importance of ESG beyond simple box-checking. The overarching argument is that everyone has a duty to behave prosocially – this is only amplified manifold at the corporate level, where there is so much more at stake. A high ESG score shines favorably on companies on the lookout for potential investors and can translate into better shareholder trust and higher (and steadier) valuations 1. Despite the clear-cut benefits of a solid ESG strategy, however, companies continue to stick to box-checking and slapping band-aids over critical issues.
There’s a raging misconception in the world of corporate executives that small actions towards sustainability are enough. When they don’t add up to significant results, frustration ensues. In many cases, narrow-minded investors react negatively because they can’t see tangible results on the graph. It’s no wonder that sustainability at the corporate level continues to take a backseat.
As vicious cycles go, this is a clear example. Companies fall back on standardized ESG checklists, which in turn propagate a culture that forgoes impactful long-term solutions in favor of quick fixes.
Making a case for value-driven ESG programs
While ESG checklists are positive, albeit tiny, steps, they’re not at all reflective of the impact at-scale organizations can have if they approached sustainability as part and parcel of their company culture. To that end, Harvard Business School’s George Serafeim outlined a five-pronged action plan2 to move beyond box-checking and reap tangible value, both financial and non-financial, from their ESG program.
- Creating prioritized ESG strategies
The individual components of ESG – Environment, Social, and Governance – don’t exist in silos and often overlap. That said, it is easier to zone in on related issues by taking E and S separately and fixing to obtain G as a whole. For example, a technology firm might benefit from working towards social issues such as accessibility, inclusion, and women in STEM. On the other hand, a travel company might seek to pursue environmental topics such as carbon emissions and deforestation. The bottom line is that the more relatable and impactful your choice of issue is on your company and industry, the more likely it is to be taken seriously and lead towards tangible profits.
It is just as important to forgo minor cosmetic changes in favor of complex, albeit more rewarding structural changes. Working toward ESG goals and superior performance isn’t a one-person show – it’s something the entire organization has to mobilize towards. This doesn’t include just the performance and internal structure, but also the company’s product offerings, messaging, and future goals. IKEA’s ESG strategy, for example, takes on environmental degradation by completely overhauling their product design vision and processes, instead of merely introducing one or two sustainable materials and calling it a day. This is the key difference between surface-level and structural changes– the latter more often than not requires a much-needed do-over of existing systems.
- Instituting overarching accountability mechanisms
Most executives today recognize (if not action) that ESG needs to inform their strategies at a corporate and organizational level. Implementation of any sort needs accountability mechanisms – however, the sad truth is that current boards are being led by myopic views and put “outdated emphasis on short-term value maximization”2. A large part of the roles of such shortsighted boards is implementing compliance-driven tasks– again, checking boxes. But the ideal accountability mechanism is one that penetrates through all levels actively and systematically.
Accountability mechanisms also enforce ESG metrics in executive compensation such that higher management is continuously motivated to act sustainably and encourage a more in-depth operationalization of ESG factors from both the top-down and the bottom-up3. Such mechanisms serve to ensure that ESG becomes, more than a few high-level metrics on paper, an intrinsic motivator in company culture.
- Driving change from the ground-up
An ESG strategy that stays in the top two levels of a company’s management is most likely not going to be successful. Even worse is half-baked instances of creating conformity across the organization – skepticism in one team snowballs into a laidback attitude throughout the organization.
In the words of BlackRock CEO Larry Fink, “a company cannot achieve long-term profits without embracing purpose”4. Purpose, in this case, doesn’t translate to clever company slogans. It relates to each employee’s perception of their impact on beneficiaries, whether that is society, the environment, or the industry. There is more power in rallying employees around a clear sense of purpose, such that each individual behaves prosocially by nature (or at least, by habit) and not by force. Companies that diffuse a strong sense of self-governance and purpose from the mailroom to the boardroom are more likely to outperform competitors.
This purpose doesn’t fly under the radar of investors – on the contrary, clearly depicted information about purpose has been linked to significantly higher trade volumes and stock prices.
- Ensuring sustained success
Sustained success involves moving beyond compliance to active operational efficiency and, finally, to innovation in ESG. Companies can’t quite let go of the handle at the very beginning, however. They can do so once all ESG-driven mechanisms have been stably diffused into existing board committees. The result is simple– ensuring that ESG becomes entrenched in every board committee’s daily responsibilities.
Folks might argue in favor of a centralized sustainability committee, and that is indeed a good place to start. However, the final goal for sustained ESG success should be to decentralize efforts and place the responsibilities on existing boards’ shoulders. This way, ESG becomes a tangible goal, a company-wide effort, and an influencing factor for every department, from human resources to accounting.
- Searching for the right investors
Corporate performance evaluations must go beyond standard markers and identify a company’s impact on the environment and the people. This impact-weighted accounting is a new take on traditional measures and far more holistic, especially where ESG is concerned.
The right investors – those who pay close attention to these metrics and rightly so– must be involved in direct communication and the mutual establishment of trust. Investors are looking for transparency, high ESG scores, and excellent corporate governance, which puts prepared companies at a distinct competitive advantage. The right investors understand the nuances of ESG and welcome efforts to get ahead in the game.
The final word
Tangible financial evidence of successful ESG actions comes from having a differentiated and long-term strategy, not just a to-do list. The ideal ESG program goes beyond operational effectiveness to lay out a roadmap by first identifying the playing field. ESG issues are not equal, at least as far as industry-entrenched companies are concerned. As a result, a differentiated (and consequentially successful) ESG strategy can only emerge after a company identifies core relatable issues that both matter to and have a direct impact on the industry.
In the case of ESG, doing nothing is more of an “eroding line” than a straight line5, and any and all foresight and preparation can lead to better investments, reputation, and environmental and social impact.