When many people think of environmental, social and governance (ESG), they imagine impact investing: directing money into a business in expectation of a certain environmental or social outcome. But sustainability expert Keesa Schreane describes ESG investing as a continuum. On one end, there’s impact investing. On the other, there’s ESG integration, which combines traditional investing with considerations like physical climate risk, which can affect financial performance.
Schreane expects to see companies put a greater emphasis on education around what ESG actually is — a trend she says can address the politicization of the investing framework.
“If we look at ESG — the conversations and politics we've seen in the past — I think there has been more of a leaning or a thought that it's philanthropic in nature as opposed to having direct financial results,” she says.
Education, Schreane says, can help put investors on the same page in understanding ESG. “The more educated we all are … the better decisions we can make.”
Schreane is a member of the Ceres President’s Council, where she works to transform the economy to build a just and sustainable future for people and the planet. The Gambling on Green author shared her perspective on the future of ESG in a Chief-exclusive session with Chief Member Aarti Kotak, Managing Director and Head of ESG and Social Impact at Ariel Alternatives.
Why You Need Data to Make ESG Decisions
These days, understanding ESG means focusing on data. Data can provide investors with signals on how their portfolio companies are performing with respect to everything from their commitment to climate issues to their work around employee engagement.
For example, data on the locations of a company’s properties and assets can help investors determine its physical climate risk. If one person has a company based in southern Florida and someone else has a business in the Midwest, the former may see an increased risk of flooding while the latter could see an increased risk of hurricane.
“Those are the sorts of things climate-related risks take into consideration and data around that is becoming increasingly important,” Schreane says.
Companies Shouldn’t Settle for Performative Actions But Real Solutions
Despite good intentions, performative solutions don’t translate to real solutions, according to Schreane. Perhaps nowhere was this more evident than in the world’s reaction to the murders of George Floyd, Breonna Taylor, and Ahmad Arbery and the black boxes corporations posted to their social media accounts as a sign of solidarity. Yet racial equity remains thin at many companies, Schreane says.
Achieving a real impact in diversity, equity, and inclusion takes measurement, she says.
“We move from performative by measuring — using measurable, repeatable, quantifiable action,” she says. The importance of measurement extends to other ESG-related efforts as well. Whether it’s GHG emissions, whether we’re looking at water use, or whether we’re looking at recycling – the one thing that all these things have in common is that they’re measurable. We can quantify it, there are numbers around it, and there are numbers aligned to it.”
Both for climate issues and DEI, Schreane says “once we put numbers around what success looks like…we can see real solutions.”
So, what do real solutions look like? A company that’s seeking to establish operations in an area with a large indigenous population, for instance, might seek to engage with that community and hire its members instead of bringing people in from the outside.
“I think that there are lots of solutions that we really need to consider and drive forward in order for us to achieve what we need to achieve,” Schreane says.
When questions of financing or resources arise, it’s incumbent upon companies not to sacrifice progress on DEI for the sake of climate efforts and vice versa. “For those things, we can walk and chew gum at the same time,” she says.
Learning From Successful Women Leaders
Successful women leaders are often known to embrace people-centric approaches, focusing on employee wellbeing, as well as customer understanding and engagement. Among the most famous practitioners of this approach was Brownie Wise, the 1950s-era Vice President of Sales at Tupperware. Wise pioneered the home party approach to Tupperware sales — the “Tupperware party” — helping turn the company into the household name it is today.
“She really understood her consumer,” Schreane says. “She understood what made them tick – so much so that many of them went on to be her employees.” And she grasped how to motivate her employees too, treating them to trophies, trips and more. “She gave them access to social mobility, which they wouldn’t have otherwise had.”
Wise’s keen understanding of Tupperware stakeholders — both consumers and employees — helped the company achieve $25 million in sales. Today, it’s not just women leaders embracing a relational way of doing business. Increasingly, the people-centered approach has gone mainstream, considered important for any leader.
Looking to Europe
While women may be leading the way in effective leadership, Europe is ahead of the curve when it comes to holding public companies accountable on sustainability. The European Financial Reporting Advisory Group, an association that advises the European Commission of the EU, approved corporate sustainability reporting standards for large companies, Schreane notes.
Meanwhile, in the United States, the Securities and Exchange Commission is working on its own proposal for requiring disclosures by companies, including reporting on how they identify, measure, manage, and plan for climate-related risks. The SEC’s work could well be influenced by Europe’s efforts, Schreane says.
For companies, preparing for sustainability reporting means allocating money for additional costs: Avoiding accusations of greenwashing could mean leveraging outside consultants to assure your reports are accurate.
“Whether it's limited assurance…or a more robust type of assurance, it's still going to be costly for firms to do that,” Schreane says. Those costs notwithstanding, public companies meeting sustainability reporting standards may find themselves at a competitive advantage compared to smaller, private peers who would be exempt from such regulations, she says. The former may fare better with environmentally conscious consumers, for example.
Ariel’s Kotak notes there’s another reason that private companies may want to jump aboard the sustainability reporting bandwagon – those that intend to go public someday need to have a grasp of their ESG data.“You don't just show up with that data on the day before you actually want to go public…Actually doing the work of ESG, actually making an impact requires an incredible amount of action and effort,” she says.
Board Members Must Be Proactive
Schreane says that a board of directors can play an important role in strengthening a company’s ESG performance. It begins, she says, by assessing what they, as a board, may be missing.
“Sometimes it's very challenging when you're sitting at the table, when you are empowered, it's hard to see where the gaps are.” Boards can fill those gaps by listening to everyone in the company’s ecosystem – not just shareholders, but also employees and customers.
It’s also important for board members to ensure that they have diversity within their own ranks. They should examine, “how many diverse people, people of diverse backgrounds, sit on the board? If they're not there, what is the risk of not having them there?” Schreane says.
Boards can help ensure that the entire company supports ESG strategies – that ESG commitments aren’t relegated to just one part of the company. The board can “look throughout the company and understand and commit to ensuring that sustainability and ESG is something that every part of the company embraces and that they want to drive forward.”
The Three I’s
To move the needle, ESG work can be boiled down to The Three I’s.
Identifying requires determining what success looks like and researching what it would take to get there, including what companies with similar profiles are doing in the space.
Integrating means ensuring every part of the business is involved in driving ESG efforts, from legal to tech.
Improving consists of going beyond disclosing failures to showing how your strategies have changed to address shortcomings and deliver progress.
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