Regulatory agencies are driving companies in the US and the EU to make commitments to comply with Environmental, Social, and Governance (ESG) criteria for corporate behavior and financial performance. Focusing on ESG initiatives and investments is growing in importance and starting to significantly influence the marketplace, particularly for services and products. Two trends are noticeable now.
First, is the trend in companies moving from a position of “virtue signaling,” in which executives talk about their desire for a cleaner planet and making their company more socially responsible, to now actually being virtuous and acting on what they proclaimed.
My observation is that there are three pictures of where companies now fall into the landscape of ESG initiatives:
- Those just dipping their toes in the ESG landscape, making small commitments, and moving slowly in making actual change
- Those making substantial commitments, investments, and operational changes focused solely on strict compliance with their CEO mandates
- Those that recognize there is a substantial opportunity to improve their brand and competitive positioning through their ESG commitments and investments
No matter the size of your company’s current commitment and investments, the agenda will matriculate down through every aspect of your company.
ESG brings a new set of requirements to add to the existing operational requirements of low cost and high quality. This aspect of the ESG agenda may become increasingly interesting since we face the prospect of a recession. Typically in a recession, the business conversation moves to focus on cost reduction. But ESG adds a new dimension to that consideration. The ESG impact will need to be aligned with cost and quality focus.
I believe your company’s commitments and investments will accelerate as you move further into your ESG agenda. The size of the ESG movement is so significant that it is likely to drive substantial investment in every company to accelerate their movement into this arena because it stands to be a competitive dimension. The seriousness of commitment to ESG agendas will cascade through the commercial ecosystem in a profound way.
ESG marketplace consequences
Boards ask CEOs to make ESG commitments, including timelines. The process of establishing those commitments and timelines spans across three scopes: a company, its vendors and service providers, and those organizations’ vendors and service providers.
The consequences for the marketplace are significant. If your company has a product or service, it will be asked to show that it is reducing its carbon footprint and being socially responsible in such operational components as workforce diversity. You will be asked to demonstrate that your company is, in fact, achieving these goals. Companies that are unable to do so will be replaced with companies that that meet the guidelines.
Moving into ESG agendas will set off a chain reaction because companies must also make commitments regarding their supply chain partners’ operations regarding ESG criteria. The vendors and third-party service providers your company buys from, and your Global Business Services (GBS) centers, must also demonstrate they meet the ESG criteria for reducing their carbon footprint and establishing workforce diversity. Further, those organizations must demonstrate that their vendors and service providers also meet the criteria. Organizations in all three scopes must move from primarily just talking about ESG to having to actually deliver against the commitments to achieve the criteria.
Consequently, your company not only needs to determine how to achieve its commitments but also needs to determine how to influence its supply chain partners and services partners to achieve ESG criteria, as well as how you will monitor or measure those organizations’ compliance.
Here are some suggestions for your company to take on influencing and monitoring its supply chain and services partners to meet ESG goals.
Action tips in your organization. Once the CEO agrees to ESG targets with the board, the CEO allocates those targets across the distinct functions. Each functional head has the responsibility to meet its portion of the company mandates. No functional area, even the small areas which have small impact on carbon and social responsibility, will be exempt from these mandates.
This will set off tremendous activity in measuring your company’s progress against the commitments and reporting that progress back to the regulatory agencies and investing community driving the agenda as well as your customers and your supply chain and services partners.
Actions for influencing your partners
Your company likely will want to influence its vendors and service providers to move further down the ESG path. Regarding reducing carbon footprint, consider whether you already included this issue in contractual obligations and ensure there is also a reporting commitment so you will know their progress against the goals.
Keep in mind that some service providers and vendors now have CSR executives who are responsible for ensuring carbon reduction in the teams delivering your work.
If carbon reduction is not included in your existing contract, you may want to consider joint investment or co-innovation to achieve the goals. Certainly, it should be included as a preference selection criterion for future vendor/provider selection.
Regarding the criteria for workforce diversity, consider how you can collaborate with your vendors and service partners in workforce planning. Consider how you can improve your practice of employing people in rural, disadvantaged communities or employing handicapped people. There are some third-party service providers (especially in India) that actively hire in such communities and target finding disabled people who can work in call centers, for instance.
Your customers will appreciate your company’s efforts in diversifying your sources for talent. That brings me to my final point.
Action to increase market share
Your company certainly needs to communicate to its customers what your ESG goals and commitments are and follow up with your progress in achieving those goals. It can become a brand differentiator if you move beyond your competitors, especially in social and environmental issues that consumers care about.
Many companies announced that they will achieve their carbon neutrality commitment by 2050. But I believe once companies recognize the potential for competitive differentiation that achieves greater customer loyalty and attracts new customers, many will significantly accelerate that 2050 timeline and their investments to achieve their goals.