ESG & Sustainability

The “E” in ESG considers whether the company, including its internal operations and supply chain, is being a good steward of the environment. The E addresses the organization’s environment-related impact and risks and what the organization is and isn’t doing to reduce those risks. ESG reporting should include dimensions such as the organization’s carbon footprint, waste management, pollution, nature conservation and sustainability efforts that make up its supply chain.  

The “S” in ESG evaluates the social impact generated by an organization’s relationships with people, including its workers, customers, suppliers and communities. Factors that play a role in the social aspects of ESG include workplace safety; employee engagement, well-being and culture; diversity, equity and inclusion (DE&I), customer satisfaction, data and data privacy. 

The “G” determines whether the organization has the right governance framework in place to serve all of its stakeholders. For organizations to do well in this area, they must clearly articulate team members’ roles and responsibilities and set expectations to ensure good decisions are made for customers, employees, shareholders, regulators and the community. 

Dimensions that may be included in ESG reporting include executive pay and rewards, board member composition, effectiveness and transparency. Stakeholders will also expect to see an assessment of how well the organization conducts audits and whether it operates ethically and with integrity.

ESG (Environmental, Social, Governance) provides a view of a company and its long-term value potential and relevance to its stakeholders. An ESG rating or report measures performance of environmental and social impacts and the effectiveness of corporate governance in managing them.

Sustainability reinforces that environmental, social and other impacts are incorporated into important business and operational decisions. It embeds value generation into an organization’s business strategy for the long-term benefit of all stakeholders.

Expectations have never been higher for organizations when it comes to ESG and sustainability. 

• Customers expect companies to take a stand on environmental and social issues and deliver value or they will buy somewhere else.
• Employees desire an improved work experience and want to be where there is a deeper purpose than profits alone. 
• Suppliers want to see business handled in a manner that is fair, equitable and sustainably-conscious.
• Communities expect companies to respect their fellow workers while delivering products and services in a sustainable way.
• As ESG investing and scrutiny continues, shareholders continue to hold companies accountable to achieve a higher purpose.

This is why it’s so critical for organizations to build ESG and sustainability into their business strategies. If they don’t, they’ll lose opportunities for investor funding, and they’ll lose customers. They’ll find it increasingly difficult to attract, engage and retain employees. Ultimately, they’ll put the long-term sustainability of their business at risk.

When organizations invest in ESG and sustainability, they’ll see growth and other benefits in a number of areas. For example, they’ll be able to:

• Access larger pools of capital: Global sustainable investment has topped $30 trillion.
• Attract and retain the best talent: The majority of professionals would take a pay cut to work at a company that aligns more with their values.
• Build credibility and trust and enhance their brand and market reputation: Consumers prefer buying from brands they trust.
• Grow their customer base: Nearly six in 10 consumers are willing to change their shopping habits to reduce their environmental impact.
• Reduce costs: Sustainability initiatives can lay a foundation for more efficient operations, lowering the overall cost of operations.
• Grow their business: Our research shows that companies driven by purpose post compound annual growth rates of 9.85% compared to 2.4% for the S&P 500 overall.

Many organizations have gone public with commitments to ESG and sustainability and lofty goals that they plan to achieve by a certain year. But many of these transformation efforts falter. 

Our research has shown that two key factors can account for the difference between failure and success: senior manager leadership and organizational culture. That’s why we believe organizations need to recalibrate their approach to ESG by focusing on their people.

Here are five people-related questions that every organization should ask.

1. Purpose: How important are ESG and sustainability to us? Why are we doing this? Who are we trying to satisfy? What is our time horizon? How do we measure success? 

Purpose-driven organizations tend to be more successful. Leaders need to be able to rally around a unified purpose that aligns with the organization’s business strategies, and that purpose must resonate with people across the organization.

But it’s not always easy to figure out why you need to change. Yet, until you do, you won’t be able to identify what actions you need to take or what levers you need to pull to succeed.

2. Governance: How does our board need to evolve to oversee, enable and support delivery of our ESG and sustainability strategy? 

Boardrooms have never been more focused on ESG-related issues. Large institutional shareholders, proxy advisors, regulatory bodies, and ESG rating agencies are studying organizations’ sustainability and risk profiles more closely than ever. The most important question for them to address is how they can ensure their organization treats ESG as a holistic and strategic business imperative.

Boards should integrate material ESG issues into their oversight and support of corporate strategy and enterprise risk. For boards to fulfill these responsibilities, they need to have accurate information. 

It takes careful thought and preparation to establish an effective reporting process. First, the organization’s leadership team needs to decide what should be measured and how to measure it. Then the board must determine how to evaluate the leadership team’s work and ensure it aligns with the organization’s values, ESG targets and overall goals. 

3. Leadership and talent: How do we attract, develop and retain the leadership, talent and skills needed to drive ESG and sustainability strategy and outcomes? 

Organizations that are serious about ESG and sustainability need to cultivate Enterprise Leaders at the top. An Enterprise Leader enables their organization to perform today and transform to meet the challenges of tomorrow. 

Enterprise Leaders apply the mindsets of purpose, courage, self-awareness, inclusion and integrative thinking. They believe they have a responsibility and an opportunity to go beyond their own interests and the interests of their function to make a significant difference to others across the enterprise and outside it. They understand how the organization connects to its ecosystem and its impact on society and the environment. Our research shows that these same mindsets and beliefs are what also make great sustainable leaders.

As for talent, organizations need to ensure they have people with the right skills and knowledge to enable change. We believe five individual attributes enable companies to develop the organizational capabilities they need:

• Analytical approach to problem-solving
• Solutions-oriented mindset
• Ability to influence change
• Empathy
• Flexibility and adaptability

These attributes are in demand, so organizations must think about ways to secure these skills. In addition to recruiting talent and filling any gaps with freelancers or contract labor, they may also be able to reskill and upskill their existing people.

4. Operating model: How do we organize to deliver our ESG and sustainability strategy, including structure, work and platforms?

To meet your ESG and sustainability goals, your organization will likely need to change the way you operate. Some organizations may need an overhaul of their structure, while others will need minor changes. Either way, you’ll need to consider whether you have organizational structures that enable leaders to lead effectively, employees to do purpose-driven work, shareholders and other stakeholders to optimize their value and customers and communities to enjoy the best possible outcomes.

Many organizations will need to shift their operating models, adopt new technology, switch their business approach or cultivate new skills to meet their sustainability goals. Here are six questions that organizations must ask as they decide how their ESG strategy will affect their operating model:

• Who do we need to be successful? 
• How do we need people to work?
• What do we need people to do? 
• When do we need people to work?
• Why should people work?
• Where do we need them to be based?

5. Culture and mindset: How do we create the right culture and mindsets, engage our people and reinforce the right behaviors?

The chances of successful transformation depend on whether an organization has the right culture. An investment in ESG-friendly structures, workforce strategies and governance models will not sustain change if an organization’s people aren’t aligned around ESG goals.

Cultural change can’t be a top-down endeavor. In other words, people won’t change how they think and act simply because the C-suite says they should. Instead, leaders should explain why the change matters and how it helps the organization better serve customers and society as a whole. They should ensure ESG initiatives are tied to your organization’s mission and purpose.

Leaders also should make sure that they walk the talk, showing that the organization’s commitment to sustainability and ESG is authentic. Then they should ask for people’s input, listen to their perspective and involve them in planning and other opportunities to shape the organization’s culture.