For the past year, ESG (Environmental, Social and Governance) has become the key topic of discussion for corporations, their boards, investors, and stakeholders.
While the work around ESG is not a novel concept – companies have been prioritizing sustainability and CSR work for a number of years now – macro events such as COVID-19 and institutional investor pressure for companies to report on their activities around DEI, climate, and societal benefit have turned ESG into a non-negotiable priority, and a lens for corporate financial assessment.
As we move into 2021 this trend remains a top priority, as exemplified in influential financial services leader, BlackRock CEO and Chairman, Larry Fink’s annual letter to CEOs and by the commitment made on January 26th, 2021 in Davos by a large group of companies like Salesforce, The Bank of America, Siemens, PayPal, Heineken, Deloitte, Sony, Unilever, Dell, and Royal Dutch Shell, who have signed on to a pledge to use a common set of ESG goals developed by the World Economic Forum.
Why should the General Counsel prioritize on ESG ?
- Increase in ESG regulation: Since 2018, there have been more than 170 ESG-related regulatory measures proposed worldwide, with more on the way. Take the EU regulation on Sustainability-Related Disclosures (“Disclosure Regulation”), for example, which is set to take effect in March 2021. General Counsel can act as strategic leaders for companies as new regulation implementation, training, and monitoring become relevant.
- Push for ESG disclosure: The need for increased, and very detailed disclosure on ESG metrics and initiatives (e.g., Description of policies and practices relating to behavioral advertising and customer privacy, from SABS) creates the need for General Counsels to ensure that the right information is disclosed in the right way. General Counsels can help navigate the increased level of disclosure while protecting the delivery of confidential corporate information, and act as the first line of defense for a firm. This will be especially important for companies that are at the beginning stages of their ESG reporting.
- ESG is a cross-functional effort: When it comes to ESG, and processes around scoping out ESG-related work, it is safe to say that for many it is a work in progress. Consequently, many companies have cross-functional ESG task forces. Given the points listed above, companies would benefit from the General Counsel having a seat at the table.
- ESG is an acronym created by the financial community but at its core, ESG-related activities align with creating companies that stand for more than just making money and the increased focus can help your company build a better reputation. ESG and reputation drivers are similar but not 100% the same. You must measure both so you can make good decisions.
ESG impacts business outcomes and core business KPIs
We use a machine learning-powered modeling approach to analyze the importance of ESG in driving specific business outcomes and KPIs such as ‘license to operate, trust in an organization, and purchase intent’.
The results from two years’ worth of data show that not only is ESG an essential factor in driving business outcomes, but its’ level of importance also depends on the business outcome sought which makes goal-setting critical to success. The old adage of “what gets measured gets done” could never be truer.
As part of our RepTrak modeling, we have identified 32 variables (we call them factors), that have a meaningful level of impact on a company’s reputation and bottom line. Our data shows that out of those 32 factors, ESG is the 5th most important factor when it comes to willingness to recommend a company. If stakeholders are more likely to recommend your company, you can gain a competitive edge and drive growth.
Interestingly, ESG becomes the 3rd most important metric that the public considers when deciding whether they will give your company the benefit of the doubt. Given the importance of the role of the General Counsel in managing both risk and opportunity at a company, having a strong emotional bond with your stakeholders will lead to better levels of “benefit of doubt” in good times and bad. This emotional bond can be established through pursuing and prioritizing “ESG-related activities”.
Moreover, ESG-related activities provide an opportunity for companies to continuously improve, be better corporate citizens, and drive societal change, while also ensuring long-term financial success. Given its importance, accompanied by the increased regulation and push for disclosure, General Counsels are in a prime position to help support and guide companies on the path to a strong ESG strategy.