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ESG Programs: Understanding the Untapped Opportunities

| By Curtis Shakotko, OneSource ESG

While it may be easy to fixate on the costs and efforts associated with implementing ESG programs, taking a closer look at ESG can reveal many untapped advantages

FIGURE 1. ESG programs can help companies to identify and prioritize their values while also improving financial performance

Environmental, social and governance (ESG) programs are intended to encourage companies to act in a responsible manner (Figure 1). With the increasing importance among investors, special interest groups and regulators, it is vital to understand what ESG represents, as well as related trends and how to use it to gain a competitive edge. ESG investing has been defined as, “a strategy you can use to put your money to work with companies that strive to make the world a better place” [ 1]. Each company generates and shares its own ESG report card, which is typically verified by an independent third party and addresses the three ESG pillars accordingly.

Environmental.This describes how the company is working to minimize the impacts from its operations on the environment. This is something that can go beyond direct operations and often includes how vendors and subcontractors are selected. In addition, suppliers should be evaluated, since this effort can not only identify potential environmental concerns, but can also help an organization protect its own interests relative to raw-material quality and availability, and can identify and reduce risk where organizations rely on their supplier stock for their own product development.

Social. ESG-driven companies are focused on how they can use the influence of their business and brand to change communities for the better. This can include a wide range of social issues, but should also be something that has meaningful impact and is supporting a cause much bigger than the company. Companies that take the lead on identifying their own social influences can influence consumers looking for responsible organizations to invest and buy from as a means of exerting their buying powers. In 2018, the Edelman Earned Brand Study found that values-based communication is as effective as product-based communication in driving purchase intent, “and a communication focused on a brand’s stand has an even greater effect on a consumer’s intent to advocate for the brand than one focused on product features” [ 2].

Governance.This refers to how the company’s management is setting the example for positive change within the organization. This can range from how executive pay is managed to hiring diversity, equity and more.

With a few exceptions, the regulatory environment is moving toward full reporting of ESG-related functions. This can be felt in the U.S. with newly promulgated regulations from a wide range of governing bodies, such as local, state and federal agencies like the Environmental Protection Agency (EPA), the Occupational Safety and Health Administration (OSHA) and the Securities and Exchange Commission (SEC) [ 3]. Some examples of how these regulations are slowly changing over time can be highlighted through recent proposed rule changes by the SEC for publicly traded companies. Until recently, publicly traded companies were only required to report ESG-related issues that were material to the business. This reporting framework was in place since 2010 and has undergone updates since President Biden signed the Executive Order on Climate-Related Financial Risk in 2021. The SEC also proposed a rule in May 2022 on climate-risk disclosures, which require companies to report Scope 1 and 2 greenhouse gas (GHG) emissions beginning in 2024. On a state level, California has passed the Climate Corporate Accountability Act, which requires approximately 5,200 public and private companies to report GHG emissions.

Most professionals agree with the importance of a well-run business that embraces environmental stewardship, social responsibility and good corporate governance. There are, however, some who take exception to this type of agenda being mandated as a regulatory requirement, because the data collection and reporting can be a costly expense. It is important to realize that, if ESG initiatives are fully embraced, a competitive advantage will begin to emerge that will allow companies to benefit from these perceived regulatory burdens.

Lower costs, higher profits

Many believe that ESG initiatives are great for large, publicly traded companies with an abundance of resources, but that they are not worth implementing for a small or medium-sized company. This is a common misconception that may be keeping such companies from obtaining a wide range of benefits. The following are several benefits to consider:

  • Cost control — A poll conducted within industry regarding the financial benefits of implementing a formal environmental managing process developed by the International Organization for Standardization (ISO; Geneva, Switzerland; www.iso.org), ISO 14001, showed that the average operating cost ratio decreases by approximately 6% [ 4].

FIGURE 2. The vast majority of companies polled reported that they experienced financial gains after formally implementing the ISO 14001 system (based on survey data from Ref. 4)

  • Improved profit margin — The same study reported that the average operating profit margin was increased by 2.2% after adopting a formalized environmental management system [ 4]. It is clear that following ESG frameworks provides generally positive results, summarized in Figure 2 [ 4].
  • Good management practices — The benefits of a solid ESG program can be succinctly described: “Sustainability is neither a program nor an initiative, it’s considered simply good management” [ 5]. Again, sustainability is becoming important to both consumers and shareholders hoping to influence practice with their investments and spending.
  • Employee retention — For example, consider a company complying with social responsibility standard ISO 26000 whose employee absenteeism was half that of their industry peers [ 6] — while other companies in their industry had a 6% absentee rate, theirs was at 3%. The company says their goal is to further reduce it to 1%, which clearly makes them a leader in their field. Hiring is an expensive investment, in both dollars and time, and focusing on retaining talent can result in considerable gains to the bottom line in both productivity and quality of employee efforts.
  • Improved compliance — According the EPA, 247 new criminal cases were opened in 2020, which is approximately 30% more than 2019 [ 7]. Because of the year-after-year increase in environmental enforcement, it is more critical than ever for management to have a plan for environmental compliance.

FIGURE 3. After adopting a formal environmental-management strategy goverened by ISO 14001, reduced waste and improved energy usage were among the reported benefits (based on survey data from Ref. 4)

  • General benefits — Considering the poll among businesses to gain feedback on the benefits of an ISO 14001 environmental management system, the general benefits of such systems are clear, as shown in Figure 3 [ 4].

Regardless of the size of a company, there is extreme value in implementing a full ESG program, and it is worth noting that only a fraction of the benefits have been identified. Therefore, if you want to improve how your business is operated, engage your team into cost-saving initiatives, increase employee retention, and add to your bottom line, it’s time to get started on ESG.

Supercharge your ESG launch

The idea of “social responsibility” and using investments to enable social change started with the trade unions and pension funds in the 1950s and 1960s with the concept really taking off by the 1970s. Since then, the idea of social responsibility has evolved into what we know as ESG today. There are two important challenges of ESG that businesses need to address once a decision has been made to pursue this type of business management style. First, the company has to define “ethical behavior.” Secondly, enough momentum must be created to effectively launch the program.

Ethical behavior.Anyone who has studied ethics can attest to the fact that there are many different perspectives and frameworks used to determine if an action is “ethical.” ISO 26000: Guidance on Social Responsibility, section 4.4 establishes, “an organization should behave ethically.” This leaves a lot of room for interpretation. Fortunately, the standard goes on to both define the terms specifically and explains, “An organization’s behavior should be based on the values of honesty, equity and integrity. These values imply a concern for people, animals and the environment and a commitment to address the impact of its activities and decisions on stakeholders’ interests” [ 8]. The standard further describes how an organization should actively promote the ethical behavior associated with implementing an ESG program. Of course, it’s the “how to” that is the challenge, because the standard has numerous different areas that all must be implemented.

 

Creating momentum

Implementing an ESG program is a major commitment that will impact how a business operates and makes decisions. Because of the magnitude of the effort, it is important to quickly engage co-workers, vendors and suppliers to gain momentum as you begin the development and implementation process. The following sections describe a few simple actions to help gain initial momentum so the entire company supports the commitment of ESG when it comes time to fully implement the program.

Communication. Even before the formal decision to pursue an ESG-style management process, it is important to start establishing the values of your company by talking about them in meetings, emails, site visits, client meetings and so on. These are all valuable opportunities to get people talking about the fundamentals of an ESG program, which should center around a concern for people, animals and the environment. It is also a great way to lay the foundations of a strong company culture. In addition, it helps to engage employees with these philosophies, because employees will also help to project the organization’s goals and vision.

Awareness.Creating awareness campaigns throughout an organization is a simple and inexpensive way to build upon initial steps taken to start the ESG conversation. As you begin developing the ESG program, do so in a manner that is transparent throughout the organization. Let your team know the status, challenges, successes and how to contribute ideas to the implementation team. This should include, not only your company, but also your suppliers and vendors. Lastly, include signs, posters and email signature blocks that keep ESG on the forefront of everyone’s mind. These small measures can go a long way in creating excitement and continuing forward momentum.

Engagement.The statement “It’s just another management idea” should never be spoken by your team. Not only should efforts be transparent and well communicated, steps should be taken to actively engage employees at all levels of the organization. This will provide much needed buy-in, feedback and incredible insight that will go well beyond the ESG program. Consider setting up committees at the different levels of the organization and formalizing them by establish areas of responsibility and levels of authority to take action. Where a senior executive meeting may set the direction of the program, a management committee meeting can provide the program development and a facility employee committee can provide practical implementation tools. It is important to have each committee keep meeting minutes so that they can be shared throughout the organization to further enhance communication.

These three ways to create momentum will provide you with the needed inertia to launch the ESG program. They will also increase employee engagement and provide a solid foundation to begin developing your company’s long-term success.

 

ESG success stories

Implementing an ESG program is a large commitment that will challenge all levels of the organization to actively demonstrate their personal values. This is a large undertaking that should not be underestimated when being evaluated for your organization. With that said, your organization will enjoy the many benefits discussed once the hard work of implementation has been completed. Below are a few success stories to consider.

Marketing firm SYKES Costa Rica started implementing an ISO 14001 program in 2008. During that time, the team began to actively manage the use of energy, water, materials, waste protocols and recycling programs in an effort to minimize the impacts from its operations on the environment. In 2018, the company achieved formal ISO 14001 certification, but that is only the beginning. Since then, the group has also achieved certifications in ISO 14064 for greenhouse-gas management and ISO 50001 for energy management, and it became carbon-neutral certified. One of the most impressive aspects of SYKES’ success is that, “In the past five years, the company’s workforce increased by 30% to more than 5,500 employees, while the non-recoverable waste decreased from 87% to 63%” [ 9]. The decreased waste is an impressive accomplishment and it is equally impressive that decreased waste results in an overall reduction in material costs.

A second benefit, which is often overlooked, is the social aspect associated with an ESG program. Not only do these benefits impact the greater community, but they also provide participants with a much stronger and more competitive company. The Society for Human Resource Management published an article entitled Closing the Gender Pay Gap that highlighted how, “Reducing the pay gap helps in the hiring, promotion and retention of women, and in turn results in more female leaders,… And more women in leadership means better decision-making and financial results for companies, according to a 2017 study by McKinsey & Co. It found that businesses in the top quartile of gender diversity within their executive ranks were 21% more likely to see above-average profitability” [ 10].

Health and safety costs are tangible savings that should be easily quantifiable by your company’s accounting department or bookkeeper. However, the ISO 45001 Academy highlights another aspect of financial benefit achieved by implementing another socially responsible initiative, a safety management system [ 11]. The blog highlights that, “Satisfied employees who feel valued are obviously less likely to leave than those who don’t. Estimations of the cost of training new employees can vary, but it is generally accepted that this cost equals something between the equivalent of 6 to 9 months’ salary to train a new staff member…” The Satell Institute published a study that highlights a 50% reduction in employee turnover as a result of implementing a corporate social responsibility (CSR) program [ 12].

Additionally, Parcel, an online supply-chain magazine, made a powerful statement when it stated that, “Poor transparency, inadequate corporate governance, and weak rule of law create an uncertain foundation for supply-chain transactions when a weak regulatory and governing environment exists in an organization” [ 13]. This highlights the need for strong corporate governance, which is one of the principal tenants of an effective ESG program. Further underlining this statement, agribusiness Bunge suffered financially as a result of poor supply-chain control, according to a Harvard Business Review report [ 14]. When flooding hit Thailand in 2011, the company lost $56 million in one quarter because of the interruption to the company’s supply chain and lack of governance over that part of the business. In contrast, other companies made investments in the farmers who supplied key ingredients for their products, and not only increased the reliability of the suppliers, but also increased the overall harvest yields, which lowered the cost to the company while increasing profits to the local farmers.

The ESG success stories highlighted here are excellent examples of how managing a company’s impact to people and the planet can positively impact profits. These examples are just the beginning of the rewards companies receive from implementing an ESG program. ■

Edited by Mary Page Bailey

References

1. Curry, B., Napoletano, E., Environmental, Social And Governance: What Is ESG Investing?, Forbes Advisor, February 2022.

2. Edelman, Earned Brand Study 2018, October 2018.

3. VinciWorks, Is ESG reporting mandatory in the U.K., the E.U., and the U.S.?, July 2022.

4. Sigurgeirsdóttir, E.B., Financial benefit of implementing Environmental Management System ISO 14001 in Icelandic companies, Iceland School of Energy, Reykjavik University, June 2014.

5. Peterson, O., ISO 26000 for Corporate Social Responsibility: How to Get Started, Process Street, May 2019.

6. Hanks, J., Attention SMOs: ISO 26000 makes good business sense in South Africa, ISO Focus+, March 2011.

7. U.S. EPA, Summary of Criminal Prosecutions database, cfpub.epa.gov/compliance/criminal_prosecution.

8. ISO 26000:2010, Guidance on social responsibility, November 2010.

9. SYKES, Efficiency & Impact as Part of the VALUE Chain ISO 14001: Environmental Management.

10. Lytle, Tamara, Closing the Gender Pay Gap, Society for Human Resource Management (SHRM), June 2019.

11. Nolan, J., How to ensure your ISO 45001 investment is profitable, ISO 45001 Academy blog, April 2017.

12. Satell Institute, Study Reveals Companies Engaged in CSR Can Reduce Staff Turnover Rates by 50%, March 2018.

13. Tanel, T., Strong Governance: Key to Supply Chain Transformation, Parcel, April 2014.

14. Whelan, T., Fink, C., The Comprehensive Business Case for Sustainability, Harvard Business Review, October 2016.

Author

Curtis Shakotko is technical consulting principal at OneSource EHS LLC (Email: curtis.shakotko@onesourceehs.com). He leads the group’s Environmental and Process Safety Consulting practices. He has a combination of over 25 years of practical, regulatory and technical management experience. He has led the organization to successfully developing strong internal controls to maximize quality and efficiency of project work, while driving organizational discipline to maintain a competitive advantage within this industry. He is a licensed professional engineer (PE) and also holds an M.B.A. degree from Regis University in Colorado.