The who, what, where, and why of ESG
You aren’t stuck in traffic, you are traffic. In ESG terms, the environment is everyone’s problem, ignoring it impacts everyone, and solving it requires everyone.
Who recalls the troll doll, the fidget spinner, or even Tiger King? Overnight each became very popular, and each also very quickly faded into a memory. Fads come, and fads go, not only in our personal world but in the business world as well. Many have witnessed TQM, Six Sigma, lean engineering, and so many other management fads leap from the pages of a book into the mainstream, only to be replaced by the next New York Times Bestseller. The result understandably is skepticism when a topic begins to grab headlines, is this really a trend, or is it merely a fad.
As we entered 2021, ESG began to grab attention leading many to ask the same question. Is this just another fad? Do I really need to spend time, money, and resources on this? Will it be gone with the next news cycle? There are a few questions that we can ask that might help answer that question:
What is the impact or potential impact if you embrace it? Can you name three specific, measurable outcomes that could result from it?
Are others engaging? If so, what are their results?
What competitive disadvantage might you encounter by not engaging now?
What problem does this solve?
When it comes to sustainability or ESG, it is impossible not to recognize the amount of capital associated with the practice. Equally impressive is how rapidly this capital has grown. Take the PRI (Principles for Responsible Investing) as one example. The signatories in March 2020 represented over US$103.4 trillion in assets across 3038 signatories (2701 investors and 337 service providers), a 20% increase over the prior year. ESG exchange-traded funds' are expected to surpass $135 billion before 2021, with a trajectory to reach $1 trillion globally in the next five years.
I recall just a few years ago when many questioned whether they could afford ESG. Most conversations centered around the return on investment. While ROI continues to be an important conversation, a better question may be can we afford not to embrace ESG? Let us think for a minute about exactly what ESG means:
The ”E” stands for environmental, which relates to reducing the impact on the communities around our organizations. We reduce our impact by wasting less, using fewer resources, and using the resources we have more efficiently. It is reasonable to assume that companies that waste less money are more profitable than those that do not pursue more efficient and effective operations.
The “S” stands for social, which relates to the treatment of your humans. People that work both inside and outside of your organization. The turnover rate of your organization can say a lot about your organization. Do you have a workplace that treats employees fairly? Do you provide opportunities for training and career progression? Does your management team provide a diversity of perspectives? Much like environmental, it is reasonable to assume that companies that treat their employees well and promote best practices amongst their humans tend to be more effective than organizations that do not.
The “G” stands for governance, which relates to the internal practices, controls, policies, and procedures which the organization follows. Governance helps ensure legal compliance and outlines how the organization governs itself. Governance is a critical component for any organization.
There really is not a “fad” about not wasting, taking care of your humans, and setting up policies and procedures when you think about it. I am not even sure there is an argument that can be made that the best practices in these areas is not important. It is pretty clear that not paying attention to ESG could potentially compromise returns. In fact, in 2015, a McKinsey study was published in the Journal of Sustainable Finance and Investment that reviewed evidence from more than 2000 empirical studies and concluded overwhelmingly a positive impact on returns (source).
If your planning to engage in an ESG strategy, it is equally important to understand your organization’s motivation for doing so. The question to answer, “why?”
Access to capital or cost of capital
Reduction of risk
Top-line revenue growth
Cost reduction
Regulatory compliance
Improving productivity
Investment or asset optimization
A clear understanding of the motivation serves to develop a strategy that best addresses the purpose of ESG engagement.
Once you understand why your organization is engaging, it is often helpful to understand what the industry is doing. How do you stack up? What does best in class look like? Are their particular best practices that are prevalent? Does a particular reporting framework dominate your industry? (GRESB, CDP, S&P Global, and PRI are just a few examples)? This is the “who” question.
With an understanding of why and who, we turn to what, as in what are you already doing. Organizations are often doing really great things; they may just need help telling their story. Developing the strategy that leverages these great things to help the entire organization.
In addition to understanding what great things you are doing now, it is equally important to understand where you are now. What is your baseline consumption of resources? Do you have policies and procedures? What is your strategy around equity, diversity, and inclusion?
The “where” question sets you up for future success, this is what you will measure future impact against. After all, what gets measured gets done.
You can help reduce the impact of the built environment by sharing this blog with your peers. Together we can impact the 39% of greenhouse gasses attributed to the built environment. It starts with awareness, and we succeed with teamwork.
Stay well!
Chris Laughman is the ThirtyNine Blog author, a blog dedicated to reducing the impact of the built environment. When not blogging, Chris is helping the real estate industry reduce energy and water impact as the Vice President of Sustainability for Conservice, the Utility Experts. Whether Multifamily, Single Family, Student Housing, Commercial, or Military, we simplify utility billing and expense management by doing it for you. Our insight into your utility consumption provides an opportunity to identify risks. Leveraging innovation and experience we ignite solutions with real impacts and track performance to ensure the trendline stays laser-focused on the goal. To get there, we must build relationships within our organizations and outside of our organizations building the critical mass needed to truly make a difference. We have before us a tremendous opportunity. Standing shoulder to shoulder, we will get this done. Contact me at claughman@conservice.com for more information.