Corporate Governance

3 paradigm shifts in corporate sustainability marks new era of ESG

Winnats Pass, Hope Valley, UK.

ESG takes a holistic approach to issues such as climate change. Image: Unsplash.

Judy Oh
Outgoing Curator, Atlanta Hub, BCG BrightHouse
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Corporate Governance

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  • We've entered the era of stakeholder capitalism where corporate 'purpose' is about maximizing long-term value to serve the interest of all stakeholders.
  • The introduction of Environmental, Social, and Governance (ESG) is part of that move towards a more meaningful business philosophy.
  • We outline three shifts from Corporate Social Responsibility (CSR) to ESG that signal the way forward for progressive leaders.

From Corporate Social Responsibility (CSR) to Triple Bottom Line (3 Ps: people, profit, planet), too many corporate acronyms sit on the side of the desk and fall short of making a lasting impact on businesses and the world. At best, they’re noble initiatives; at worst, they’re paying lip service. The biggest pitfall of corporate sustainability programmes is that they are not embedded into the core of the business to make meaningful, systemic, and long-term value creation.

Have you read?

The most recent evolution in the journey of corporate sustainability is ESG: a set of Environmental, Social, and Governance criteria to measure and evaluate a company. What separates ESG from precursor programmes isn’t just a change in acronyms, but the paradigm shift from a shareholder-centric philosophy to one that is undeniably focused on all stakeholders. The evolution from CSR to ESG can be broken down into these three fundamental changes:

1. From message to meaning

CSR and other precursor programmes are self-regulated practices and policies that capture a company’s commitment to positive impact. While these CSR commitments are communicated widely through marketing messages, they lack quantifiable and comparable data to validate their outcomes. Some companies and their CSR programmes are even criticized for green washing, leaving consumers ever more sceptical of corporate sustainability initiatives.

Storytelling remains paramount with ESG, but it’s validated with specific metrics that gauge a company’s holistic performance. The amount of transparency and specificity of the ESG metrics as well as incorporation of broader frameworks such as the Sustainable Development Goals (SDGs) bring a new layer of meaning.

Let’s take Diversity, Inclusion, and Equity (DEI) issues for example. While companies have championed DEI initiatives through symbolic gestures in the past, they have tiptoed around how transparent they are with DEI metrics. Salesforce is one of many companies that are now leveraging ESG metrics to go beyond surface-level claims. Since 2017, Salesforce has introduced a diversity scorecard to keep leaders accountable, as well as publishing their annual Equality Reports that includes representation data along with the company’s DEI strategies and employee stories.

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2. From silos to systems

CSR programmes from company to company look quite different – each housing a variety of loosely connected activities ranging from philanthropic causes to employee volunteerism. Due to the varied topics and activities that fall under CSR, the oversight among these programmes is often siloed across the organization.

ESG issues, on the other hand, are fundamentally intersectional. “E”, “S”, and “G” are not separate categories, but rather interconnected. Let’s consider climate issues for example – ESG looks not only at an organization’s environmental impact, but also the social justice issues around the disproportionate impact climate change has on low-income populations. This type of system-based programme requires an integrated approach to management where the entire leadership team, including the Board of Directors, takes ownership.

UPS is leading by example in this area by making key changes to its leadership to reflect a holistic approach to ESG governance. Specifically, UPS separated the chairmanship from the CEO to create the first independent chair in the company’s history and added five new directors to increase board diversity. In addition, UPS added two new roles to the Executive Leadership Team including Chief Sustainability Officer and Chief Diversity, Equity, and Inclusion Officer.

3. From cost savings to value creation

The final difference worth noting in the evolution to ESG is the motivation behind pursuing corporate sustainability. Traditionally, the argument used to get stakeholders on board to pursue CSR initiatives was the benefit of driving down business costs, such as lower energy consumption.

Today, that narrative has profoundly changed. ESG acts as a strategic lever that drives new growth opportunities and enhances performance. In fact, according to a study by BlackRock, 81% of a globally representative selection of purpose-driven companies with better ESG profiles outperformed their counterparts in 2020, despite a market downturn. When done successfully, a bespoke ESG strategy is underpinned by the company’s purpose and embedded deeply within the business operations.

81% of a globally representative selection of purpose-driven companies with better ESG profiles outperformed their counterparts in 2020, despite a market downturn.

Figures from a study by BlackRock.

Unilever has been recognized as a pioneer in leveraging corporate sustainability to drive business performance. To live out its purpose – to make sustainable living commonplace – Unilever executed on an ambitious 10-year Unilever Sustainable Living Plan (USLP) and cultivated a subset of its portfolio of brands to follow their Sustainable Living Brands metric. Since this metric was introduced in 2014, Unilever has reported that these select brands were growing 69% faster than the rest of the business and delivering 75% of the company’s growth.

Change is here to stay

ESG considerations are at the top of the agenda for key stakeholders – millennials are leading the charge on sustainable investing, and consumers and employees are increasingly looking for businesses that share their values. There is also a movement towards global ESG reporting standards from both the business and regulatory communities that is expected to intensify.

With demand coming from all angles, we’re on the brink of a turning point in the business world. In fact, Bank of America & BofA Securities predicts $20 trillion in assets will flow into sustainable funds and strategies over the next two decades, nearly equalling the market value of the S&P 500 today.

Organizations that fail to embrace this new era of corporate sustainability risk getting left behind. If you are a corporate leader, now is the time to assess how your organization relates to ESG by answering the following questions and re-align with your leadership teams on a path forward:

  • How are you measuring the effectiveness of your sustainability programmes?
  • Who makes decisions about these programmes?
  • How does your “purpose” underpin your sustainability strategy?
  • How is your sustainability programme driving growth and performance of your business?
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Related topics:
Corporate GovernanceClimate Change
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