However, according to PwC survey conducted in 2021, up to three quarters of leaders were only in the early stages of their ESG journeys with regards to awareness and prioritisation. In that case, what should organisations know before they develop and fulfil these obligations on a practical level? What are the key considerations for their effective implementation?
In this blog, Richard Coates and Eleanor Simmons identify key points to consider as a CEO or leadership team, before embarking on the task of assessing, designing and transformation that will come with setting and pursuing a Social Purpose, drawing together an ESG framework, and implementing a Sustainability strategy.
Social Purpose, ESG and Sustainability: What are they?
Social Purpose provides an over-arching, broader social “meaning” to business practice – it is part of the organisational DNA and must be aligned with the business model to bring together employees, customers, suppliers, and the communities within which it operates. This means getting buy-in from every identified stakeholder group and ensuring that they relate to, identify with and feel inspired by Social Purpose. This will be imperative to its overall success.
ESG – Environmental, Social and Governance considerations – are the framework, guidelines, and targets that outline how an organisation will contribute, in its day-to-day functioning, to the environment, society and to right and fair compliance, control and governance. These will differ depending on organisational activities – one of environmental or social may dominate – but ultimately it looks at the risk of harmful impact and how to reduce it.
Sustainability is largely used as a blanket term by companies to cover how they are making practical change to contribute positively to the environment and society. Sustainability is about taking practical, simple (and if you can, consumer facing) steps to work towards your ESG targets. This often comes to life as a business strategy that creates and maximises long-term economic, social and environmental value alongside sustainable long-term growth.
Social Purpose, ESG and Sustainability: What should I consider?
- Social Purpose sits at the core of the organisation and should underpin both ESG and Sustainability practices: Executed well, Social Purpose places “purpose” at the centre of the organisational rationale and should encompass strategic and operational decisions and actions throughout the organisation. For those who are assessing Social Purpose within their organisations, it’s about asking ‘what over-riding contribution can we make to society that can simultaneously sit as our central reason for being, and also play a fundamental role in busines practice’? In this case, Social Purpose will either generate profit – i.e., an ethical supply chain and/or charitable practice embedded into the business model – or transcend the generation of profit – i.e., an external commitment that means the organisation will invest in certain social causes or promote and support a social message using marketing and communications.
- Social Purpose needs to deliver for key stakeholders, but perhaps the most fundamental of these is employees: Purpose is of no use unless it serves every stakeholder group associated with the business – this can be any number of groups, including the communities it affects, partners, customers, management, the board, and employees. Employees who feel that the purpose of the organisation they work for directly applies to their work, and both inspires and helps them, are more motivated and more productive. Starting, as an organisation, with surveys and case studies can help to understand and clarify what this looks like. In long-standing organisations with legacy systems and processes, there will likely be resistance to change from employees. For this reason, once decided on, with the agenda set by board, ensuring the effective delivery of Social Purpose in practice requires that the culture is set and followed through by leadership.
- A unified and purpose-driven employee base will drive brand value for both investors and consumers: Social Purpose should be part of the DNA of the organisation and, with the right approach, will make it more attractive to investors. Social Purpose has been proven in its ability to attract and retain talent – particularly millennial talent. 60% of millennials want to work for companies with a ‘purpose’, while a sense of purpose and impact on society is the second top criteria for young peoplelooking for work. It is a proven driver of productivity (purpose driven workers have 20% longer expected tenures and are 50% more likely to be in leadership positions). A strong, motivated and unified workforce drives brand value (Kantar’s Purpose 2020 report showed that brands with purpose at their core had a brand valuation increase of 175% over the past decade). This, in turn, drives investor value: particularly among the younger investment base – according to Coldwell Banker, the “Great Wealth Transfer” will see millennials holding five times as much wealth by 2030.
- Governance measures or standards are difficult to identify and run the risk of application for application’s sake, but developments in ESG Regulation should always be on your radar as a company: Applying an ESG framework that works specifically for your organisation can be difficult to identify, particularly when each organisation’s impact on society and the environment is so wide-ranging and particularly because there are no agreed national standards or an “official” set of ESG guidelines. Often, guidelines are too broad or light touch and don’t force the organisation to be answerable to meaningful change. As PwC highlight in their 2021 report on the ESG Revolution, “the most immediate call for action often is some combination of heightened regulatory requirements, risk awareness, and demand for data and transparency to enable the management and disclosure of ESG factors”. However, there are signs of official metrics and the possibility that this could change. In January this year, more than 60 global companies signed a commitment to follow the World Economic Forum’s “Stakeholder Capitalism Metrics.” In 2020, before the pandemic, the accounting world’s Big 4 collaborated with the International Business Council to recommend standards for ESG performance metrics.
- Regulation will drive measurement and targets, which in turn will provide more easily accessible performance indicators to investors: Should enforced and answerable regulation be implemented, this could mean complying with government limits on carbon emissions; tax-related performance penalties, and, if new pressures take hold, net-zero policies and tighter linkages between ESG targets and executive compensation packages. In the EU this is already the case for asset managers and larger companies, who must comply with ESG regulation as part of the European Green Deal and EU sustainable finance regime; the UK is likely to introduce an equivalent, with British businesses who maintain access to the EU able to choose which they would rather comply with. This will make it easier for Investors who are already prioritising ESG credentials as a key category; in the US, investments in sustainable ETF and mutual funds grew 96% between January and November 2020 alone, while the U.S. Commodity Futures Trading Commission established a Climate Risk Unit to analyse climate risk across derivative markets. Equally, a survey on millennial investors by the DeVere Group found that some 77% of them say that ESG concerns are their top priority for investment opportunities.
- Above all else, ESG targets and efforts must be genuine (and for this reason are a natural follow on to Social Purpose); high level promises and artificially inflated figures defeat the objective of ESG: A high performing ESG company is in general, a better-run company; but data also shows that organisations that can prove and effectively market their ESG credentials are better able to foster a positive relationship with consumers. We know this is having a material effect on business concerns – a post-pandemic PwC survey showed that 42% of CFOs in consumer markets are concerned about lower consumer confidence dragging down consumption. But it’s important that these pressures don’t drive artificial ESG practice. According to Visual Capitalist, the lack of popularity of less compliant ESG organisations with investors forces down their value, putting pressure on top players to minimise losses, often with artificially inflated predictions and the rushed enforcement of “token” ESG measures. This won’t wash with the new ESG enlightened consumer; the point of ESG for them is that it drives meaningful change. Gen-Z consumers are 85% more likely to trust a brand that supports a social cause or is socially responsible, 84% more likely to buy their products, and 82% more likely to recommend that brand to their friends and family (Fuse Marketing).
- An effective Sustainability strategy can and will contribute to process efficiency: Business with sustainability initiatives are more attractive to consumers, conducive to growth, and therefore more attractive to investors. Sustainability practices enable resource efficiency and cost reduction; with significant correlation between resource efficiency (from sustainability strategies) and financial performance found by McKinsey; while companies across a number of sectors that scored well on efficiency were those who had taken their sustainability strategies furthest. Connecting sustainability to efficiency and cost base in your organisation should not be overlooked.
- Putting in place an effective Sustainability strategy will contribute to a longer term play for customer acquisition; particularly those that, if possible, support customers in their own sustainability efforts: Upward of 70% of consumers surveyed by McKinsey on purchases in multiple industries said they would pay an additional 5% for a green product if it met the same performance standards as a nongreen alternative, and 44% of companies identified business and growth opportunities as the impetus for starting their sustainability programs. So, sustainability practices can act as a differentiator that can support entry into crowded markets; but the reason for this is also because consumers want companies that actively support them in their own sustainability efforts. Deloitte’s 2020 Sustainability study showed that ethical and sustainability issues remain a key driver for almost a third of consumers, who claim to have stopped purchasing certain brands for that reason – customers want to be sustainable with low effort, based on where they shop, at places that will tell them HOW to dispose or recycle an item as well as better information around sourcing, and the signposting of ways to renew or repair a damaged item.
- It’s important to remember that despite the growing attention on Sustainability, when it comes to the end product, for the consumer or business, price and convenience still often reign. Finding the balance between following a sustainable strategy but providing the same level of service will be a key challenge for organisations. We know that Consumers actively expect brands to drive change, with Edelman finding in 2020 that nearly 75% believing CEO’s should lead change against world issues rather than governments, while 50% of consumers across 14 major markets, including the USA., China, India, Mexico, UK., The Netherlands, Germany, Brazil, Japan and more are belief-driven buyers, of which 60% are millennials and 53% Gen Z. However, we also know that this only goes so far; customers often talk the talk but fail to walk the walk – despite wanting to shop more ethically, customers still prioritise price and convenience. Nielsen data shows that only 15% of Canadian households purchase 100% recycled products. I.e. consumers almost more likely driven by price and quality over social impact. Making sure that sustainability strategies stay consistent with the overall consumer or business offer should be a key consideration.
Understanding each of these three areas is important, but how do these rapidly growing topics interact and align with each other, and how can they be applied within an organisation in a way that allows them to work together effectively and contribute positively to the strategic agenda of the organisation and its culture?
The relative importance of these three factors and the relationship between them will vary across organisations, based on their business model and sector. For example, some organisations with a relatively low environmental impact, may likely prioritise Social Purpose as the ‘higher order’ force to orientate around, whereas other organisations may prioritise ESG or Sustainability to be the central pillar. Either way, the challenge for organisations is to consider these three increasingly significant forces and determine how best to respond to the individually and collectively.
Established in 2012, Whitecap Consulting is a regional strategy consultancy headquartered in Leeds, with offices in Manchester, Milton Keynes, Birmingham, Bristol and Newcastle. We typically work with boards, executives and investors of predominantly mid-sized organisations with a turnover of c£10m-£300m, helping clients analyse, develop and implement growth strategies. Also, we work with clients across a range of sectors including Financial Services, Technology, FinTech, Outsourcing, Consumer and Retail, Property, Healthcare, Higher Education, Manufacturing and Professional Services, including Corporate Finance and PE.