Don't call it a comeback
You can't gain or maintain without ESG
Something weird is happening out there. After the pushback and subsequent green-hushing, companies seem to be getting back on track with ESG despite proclamations from the WSJ that it is long dead.
I’ve wondered if we would hit a turning point with ESG, and I think we’re finally getting there.
Yes, I am saying this in the week after Tractor Supply Co. abruptly pulled its entire DEI strategy (except for veteran stakeholders) and rolled back its Environmental goals in favor of land and water conservation (which is a material issue for the majority of their stakeholders).
While this move is disappointing, most companies seem to be progressing.
Perhaps it is because we’ve moved past transient US Presidential candidates fighting the term or because time and again, state legislation against ESG stalls and there are more important issues to focus on. More likely, companies are seeing the effects of the world on their business and figuring out that they can’t avoid them.
Whatever the reason, in the silence, companies are coming to an ESG mindset. In some high-profile cases, they are even coming back to the acronym.
According to a new report by the Diligent Institute and Spencer Stuart covering Sustainability in the Spotlight: The Balancing Act of ESG, 96% of Corporate Directors expect a continued or stronger focus on ESG!
Yes, ESG is a term used by real companies that you’ve heard of in the real world.
No company is getting it entirely correct, but something has changed over the past year that goes well beyond the ‘return to value’ trend I wrote about in February 2023, where companies identified the backlash as a risk and ‘just doing the work.’
I’m not the first person to write about this. Over at Portfolio Advisor Future, Natalie Kenway wrote a piece about the shift to ESG from the perspective of the financial markets, citing several articles along the way. Her read includes this thoughtful observation from Peter Walsh, director of ESG market strategy & partnerships at Benchmark Gensuite:
ESG investment will continue to grow because it is driven by legislation, but more importantly, because it just makes business sense. As the world experiences unprecedented extreme weather events, any investor taking their fiduciary duty seriously will recognise the value in understanding ESG risk and opportunity.
As I wrote in my open letter to CEOs in early 2024:
In operating your business, you cannot back away from ESG because that would mean ignoring material Environmental, Social, and Governance issues that affect your business.
These issues cannot be avoided, so why not call it what it is: ESG?
I’m often asked how I stay optimistic about ESG with so much controversy and silence. The answer is simple. First, I talk with too many passionate people to believe that companies aren’t doing the work in some way, even though I rail against the ‘distraction’ of regulations and disclosures. There is productive work happening in pockets. Second, these issues cannot be avoided. Everything is ESG. It’s just getting boards, management teams, and employees to see it.
This is an excellent opportunity to tell you that if you need a bulk order of “ESG Mindset” to mainstream ESG at your company, reach out to me!
You can brand the book and have a company leader write a custom foreword.
Corporates launch ‘ESG reports’
So, the investment side appears to be resetting and settling in on ESG, but what about corporates? After all, they are the focus of ESG from the markets and other stakeholders.
This past week, several companies released ESG reports, all unapologetically using the ESG acronym in the title and throughout.
Let’s review how the company and its executives frame ESG, focus on one interesting point from the report, and then conclude with the number of mentions of ‘ESG.’
The first one is Dell, which just published its FY24 ESG Report. I have two different examples from Dell in ESG Mindset, and I’m glad they are still going strong.
Per the opening letter of the report, Chairman and CEO Michael Dell writes:
Sustainability and ESG commitments are now widely recognized as business imperatives that impact everything from supplier decisions to business strategy.
ESG is an integral component of decision-making. It doesn’t need to supplant traditional decision points and metrics but should be layered on as an additional perspective to inform these types of decisions.
For fellow ESG advocates, I encourage you to read pages 11 and 12 specifically to see the descriptions of how Dell thinks about its material issues. Page 11 outlines its material issues, and Page 12 has the graphic below plotting them out in a materiality matrix.
Seeing Environmental & Social Regulatory Compliance in the lower left, I had a little chuckle. This shouldn't surprise you if you have been a subscriber for a long time. But more seriously, the issues in the top right make complete sense for a technology company, don’t they? Without reading their reasons, it is easy to find materiality in each of those five issues.
Notice the absence of ‘carbon emissions’ as a material issue. If you read the report, you will find emissions, but materially, it sits under ‘Energy and climate change.’ I believe Dell’s placement here, instead of in a separate category, shows an advanced understanding of its risk beyond decarbonization.
“ESG” appears 248 times throughout the Dell report.
Let’s stay in the technology sector for the next one, Lenovo. Like Dell, we find an explanation of materiality, followed by stakeholders early on in the report (on almost the same page number).
What’s interesting about Lenovo’s executive statements in the front of this report, though, is that they are closer to sustainability and values than business value. However, the report overall represents a mix of both sides.
Lenovo CEO Yuanqing Yang addresses an extremely material stakeholder issue upfront in the letter (Michael Dell has the same one). Yang also discusses AI's planetary and social impact.
Lenovo is shaping our AI integrations with a strong governance model – the Responsible AI governance framework that covers ethical, legal, safety, privacy and accountability concerns of AI.
I also get asked about these connections often.
Having this so early in an ESG report reflects the issue’s material importance to the company.
Both Dell and Lenovo also explain the oversight of ESG issues in their Governance sections. If you want to get started with ESG and build out similar models for managing ESG issues, I recommend reading about Dell’s and Lenovo’s approaches. So often, we skip over these reports, looking for the metrics or which standards are listed. There is value in seeing how a company approaches the work.
Lenovo’s approach is found on page 72 (again, almost on the same page number as Dell).
The Board acknowledges that the corporate ESG landscape is evolving, and that the effective governance of ESG matters is fundamental to a company’s ESG accountability. As the Company regularly evaluates the ESG risks and opportunities faced by the industry and the potential impacts on the Company’s business continuity plan, the Board strives to strengthen the oversight of ESG programs and practices that will help to build a more resilient future for all.
This statement shows that the company understands ESG beyond what a CSR report might historically show. ESG represents risks and opportunities.
The ongoing evolution of the ESG landscape is a worthy topic to focus on. Despite ESG’s long-term focus on single or related issues, new material issues can crop up. It is always best to continually assess progress alongside new issues and their effects on the company.
“ESG” appears 284 times throughout the Lenovo report.
Next up is The Carlyle Group, a Private Equity firm. If you aren’t familiar with Carlyle Group, I wrote about them in that February 2023 article mentioned above. They were the first company to call out the anti-ESG movement as a risk to the business in its 10K.
This quote from Carlyle CEO Harvey M. Schwartz captures their perspective on ESG well.
We believe prioritizing resilient investment outcomes grounded in sustainable business models can produce more durable cashflows over the long term.
There’s a lot of brilliance and core ESG concepts packed in this one sentence and a little bit of ‘this isn’t a win-win.’ ESG takes an investment to create something that can be maintained over time, leading to the durability of your returns.
I love that.
The Carlyle report mentions something similar to Lenovo’s call out of the evolution that is worth pointing out.
There were several notable highlights to our work over the past year, reflecting the concept of ‘dynamic materiality’ in ESG. This concept refers to the idea that the environmental, social and governance factors that are relevant for a global and diverse investment portfolio are constantly evolving as new issues emerge, technology shifts, regulation comes into place, and more. We continually work to assess these new issues and to develop more efficient and effective sources of data. We are also seeking approaches that mitigate emerging risks and capitalize on new opportunities across our investing.
This is a critical point that I’m not convinced many understand about ESG. With the rapid pace of climate change, shifting stakeholder sentiment, legal issues (I will not cover the Chevron deference here), and technology, companies must continually reassess ESG issues.
While companies make commitments to decarbonize and set other ESG-related goals, it is in the rapid changes hitting the company and the company’s ongoing assessment that ESG can provide value over time.
For many, this seems to get lost among the goals and annual ESG reporting cycle. If you ‘set ESG and forget it,’ you miss the point.
“ESG” appears 189 times throughout the Carlyle Group report.
ESG never went away
Each report is worth reading for anyone struggling to break out of the mire of disclosures and looking to make an impact. Rather than reading them for the stakeholder content they represent, look at them as guides to convincing leadership and other internal stakeholders how a material approach that focuses on the long term can benefit the company.
If nothing else, these ESG reports show that, despite claims of its death, ESG hasn’t gone away. If just these few reports are indications, companies are getting it, and the Diligent report supports that idea.
In the report, 53% believe in the Continuation of current sustainability strategy and goals (more sustainability), with only 41% seeing a Stronger focus on sustainability initiatives and linkage to strategy and business impact (more ESG). Globally, Carbon footprint reduction leads the efforts, with Facilities/operations close behind, perhaps showing non-material decarbonization efforts. The good news is that Business growth/revenue expansion plans and Integrated risk management plan, which are more ESG, follow close behind.
Without an ESG mindset, you can’t gain or maintain a stable set of business operations over time, which is a recipe for introducing risk. The path forward for business is consistency around ESG, which is applied recursively year after year, adjusting for change and always focusing on materiality and the long term.