How to Operationalize ESG

As we enter 2021, environmental, social and governance (ESG) continues to be a top priority for boards and management teams. Karen Snow, Senior Vice President and Head of East Coast Listings and Capital Services at Nasdaq, interviews veteran board member Betsy Atkins to get her insights on how to operationalize ESG.

What specific advice do you have for public company directors?

Directors can start the process by looking at the many good policies your corporations already have in place. The opportunity is to communicate your existing excellent practices in your HR organization which are of course equal pay, inclusion and diversity, wellness, safety.

Likely all your companies are good corporate citizens and are efficient with water and energy and don’t pollute. Your supply chains likely are not using endangered species/rare wood or child labor. Likely, your policies on cyber are in place to do appropriate oversight software patching and updating and you have anti-corruption and anti-bribery policies. You likely have appropriate data privacy policies.

Start by capturing the information you already have in house and communicating this in your annual report, CEO letter, website and proxy.

There are many ESG frameworks. The stock exchange data seems to show that the SASB framework in combination with the MSCI rating agency seems to correlate to very high returns. Additionally, Larry Fink of BlackRock endorses SASB and MSCI.

Pick the frameworks that are most appropriate for your industry / business and the rating agencies where your companies results will be rewarded.

Start by quantifying what you’re doing by organizing, measuring and communicating your data. It’s the first step as boards look to embrace E.S.G. and communicate it.

Is ESG something private companies should do or only public companies?

ESG reporting is not a one and done. It should be part of your company’s annual reports to your different stakeholders that show your progress towards its ESG goals.

ESG is not just for public companies. Private companies are well served to integrate ESG into the overall strategy as it can be extremely advantageous and a positive differentiator.

External ESG reporting gives your customers and employees key insights into your brands mission vision and values; it is an opportunity to augment your brand halo.

Strong ESG reporting is also a positive when/if you are seeking funding either privately or on the public market. Investors will value a strong ESG stance and you will be granted access to larger pools of stickier capital.

What external influences will speed ESG adoption?

First and foremost, the regulatory landscape will of course help drive and speed up adoption. Companies would be well served to try and get out ahead of the inevitable regulation coming from both public and private sectors.

Also, the evolving view of what exactly a boards fiduciary duty will also speed ESG adoption. Canada, Sweden, and the UK have taken steps to expand the scope of the concept of a fiduciary duty. Will Martindale, head of policy at Principles for Responsible Investment (PRI), even said that “Failing to integrate ESG issues is a failure of fiduciary duty.”

Another factor that will speed ESG adoption is the market. Customers want to shop at businesses whose practices align with their values and employees want to work for a company that is a good corporate citizen and has clear purpose and value.

You mentioned some of the regulatory steps taken in Europe to expand the definition of fiduciary duty. Is Europe ahead on ESG? It seems to be.

Well, regulatory trends tend to start in Europe and then make their way across the pond.

The EU was ahead of regulating platform giants and focusing on consumer data privacy (GDRP) and we see that topic trending now in the US. In 2012 the European Commission put forward a law aiming to accelerate the addition of more women on boards to reach gender parity and of course now in the US gender diversity (among other forms of diversity) is a topic that is on everyone’s mind.

When it comes to ESG, 85% of European investors compared to 49% of US investors say they are incorporating ESG factors into their investment analysis.

ESG is gaining momentum in the US and companies should expect an influx of activity and interest in the coming year from all their various stakeholders (shareholders, customers, employees, communities, etc.).

Do some industries lead in ESG? If yes, which ones?

Whichever industry you are in, it is important to begin the process of ESG reporting so you can see where you stand relevant to your peers. You don’t want to fall behind the bell curve and become a laggard.

It is also important to be sure you are reporting on ESG factors that are material to your industry sector. A software company reporting on their water usage is perhaps not as strong an indicator of their ESG practices as what their consumer data privacy policies are.

Across all industries there are leaders and there are laggards when it comes to ESG; evaluate where you are relative to your peers and focus on areas where you can improve and show measurable growth.

Are all industries adopting ESG at the same pace?

No, and that is ok. It may be easier to adopt ESG practices if you are a services economy company i.e. an agile growth SaaS company that really doesn’t have high carbon emissions or high water usage, etc. compared to a company in a so called real economy heavy industries such as oil and gas or mining.

However, adopting a “wait and see” approach to ESG is not going to cut it anymore no matter what your industry is.

Investors and all your other stakeholders want to see that you have set thoughtful, measurable goals that are relevant to your business and that you can report and show progress towards these goals along the way. ESG is not a one and done exercise – it is an ongoing journey and is something that needs to be interwoven with the overall strategy and direction of a company.

Has COVID-19 impacted company commitments to ESG?

It is well known that Covid has sped up digital transformation and tech enablement by 5-10 years, but it has also sped up ESG adoption and many companies have ramped up their commitments to ESG.

This global crisis has been an opportunity for companies to operationalize their culture and has highlighted the need to focus on employee wellness and reevaluate how to best meet the needs of customers.

I believe that companies with strong ESG policies in place will outperform their peers in this strained economy.

Consumers are increasingly interested in whether the companies they support are good corporate citizens with values that align with their own. Consumers (particularly demographics such as Millennials and Gen Z) are eager to support companies with good external messaging around their ESG practices.

Are all stakeholders equally influential in driving ESG adoption? Which stakeholders will have the most impact: employees, customers, investors, community?

ESG is more important than ever to all stakeholders.

Having ESG be an integral part of the company strategy will enable you to attract and retain the best talent. Highly skilled employees are desirable, and they want to work for a company that as clear values and a mission driven purpose.

Your customers will be loyal to your company if you have positive brand halo and a strong reputation.

Investors will increasingly be considering ESG factors when evaluating companies. Having a strong narrative will enable your company to have access to bigger and differentiated pools of stickier capital.

Will companies be penalized for incomplete ESG reporting?

You will be penalized if you don’t have anything you are reporting re ESG programs.

Your various constituencies will reward you for starting the process even if your implementation of your goals is incomplete.

You need to pick the frameworks that are most appropriate for your industry and pick the rating agency where you will be most rewarded. For example, if you’re a high emitting real economy industry like oil/gas, mining, etc. reporting a climate goal is especially an important focus, the TCFD (Task Force on Climate-related Financial Disclosures) would be a framework you would want to look at.

Start by quantifying and measuring the things your company is already doing and set measurable goals. Don’t hesitate to share these goals with your various constituencies even if you are not there yet in terms of being able to report on progress.

Investors want to see that you have an ESG narrative and a plan that has specific quantifiable metrics they can get behind.

What should boards expect in this upcoming proxy season? Will activists be using ESG?

In the past, financial under performance made you a target for activist activity.

Now ESG is the trojan horse for activists who are citing issues such as lack of diversity, poor environmental policies, etc. This year Elliott suggested in a public letter to Evergy that they consider reducing their carbon footprint. Third Point send a letter to Prudential saying that having a London HQ for their American and Asian businesses creates an excessive carbon footprint.

As a company you can prophylactically immunize yourself from activists by refreshing your board and proactively reviewing policies related to environmentalism, human capital management and other social issues that are material to your business.