The first in a CSRwire series based on Deloitte's Business Trends 2013 report provides an overview of the trend toward embedding ESG into core business strategy.
By Dinah Koehler and Chris Park
Part I of the Business Trends series
Earlier this year, Deloitte published its inaugural Business Trends 2013 report, a collection of articles that summarize eight emerging trends that influence top-line strategy. One of the trends, The Responsible Enterprise, explored the accelerating interest in environmental, social and governance (ESG) issues and provided insights on how companies can reap the benefits of the trend and use ESG to drive shareholder value.
In a series of blog posts over the next several weeks, we will provide an overview of the trend, explore the drivers behind the trend, provide lessons learned and share insights on what can be expected in the future.
ESG Becoming A C-Suite Issue
Historically many companies have treated ESG issues as important but tangential to core business. Sometimes their motivation was a desire to be recognized as good corporate citizens. In other cases, ESG issues were viewed as a matter of compliance with regulation or stakeholder and public demands. As a result ESG issues were often managed without a direct connection to the core business, bottom line and business strategy.
All of that is changing.
The market today is undergoing a significant shift, with companies increasingly expected to address ESG issues head-on. ESG is becoming a C-Suite issue and is expected to have an important impact on the bottom line. At the same time, many are recognizing both the tangible and intangible value of integrating these issues into core business activities. Commitment of human and financial capital to this area continues to grow, especially among companies that increasingly see impacts on their value chain.
Three Drivers Of ESG Imperatives
In a recent Deloitte survey of 250 business executives, three drivers of ESG imperatives were identified: a need to bolster the corporate reputation and brand, increased regulatory scrutiny, and higher expectations from consumers and the broader community. Most of the surveyed executives expect ESG issues to have a growing impact on their strategies, products and services, and operations over the next two years.
The executives, who ranged from vice presidents to board members working in companies with over $500 million in global annual revenue, were surveyed from November 28 to December 5, 2012. Respondents represented 12 different industry sectors, with the most respondents from the financial services industry.
Not surprisingly, large companies (with more than $10 billion in revenue) foresee the greatest impact. These companies tend to operate across industries and geographies where the social and environmental issues are most acutely visible.
Respondents to a related LinkedIn survey launched as part of this research agree that their competitors are focusing more on ESG issues to strengthen their brand and reputation and reduce business risks [Over two-thirds of 188 respondents believed their competitors pursue an ESG strategy to bolster reputation and brand]. Another Deloitte survey found that two-thirds of global CFOs expect their role in ESG related strategies to increase over the next two years.
Focus on ESG: A Long Term Trend?
The increasing focus on ESG issues is a long-term trend, driven by rising public awareness and the need to adapt to macro global shifts, including income disparity, demands for higher quality of life and environmental degradation. Companies that are further along the journey toward integrating effective ESG measures into risk management approaches, business operations, and strategy will likely be in a stronger position to compete in the future. Responsible enterprises have the benefit of being able to take a strategic and measured approach when responding to stakeholder pressures and environmental crises.
Starbucks provides an example of an enterprise that has taken steps to integrate ESG into its core strategy and improved its ability to compete. After a long history of growth, Starbucks was beginning to show signs of weakness. Financial markets and analysts had started to write off the company, leading to a loss of more than $25 billion in market capitalization. In response to the crisis, the board reinstated company founder and former CEO Howard Shultz to orchestrate a turnaround.
The Starbucks Example
Starbucks had a strong track record of corporate citizenship. In fact, it was the first privately held U.S. company to offer all employees health benefits and stock options. However, it had gradually drifted away from its core values.
In a bold and symbolic move, and despite board reservations, Shultz organized a major conference that brought together all 11,000 of the company’s managers to New Orleans in the wake of Hurricane Katrina. The conference kicked off with more than 50,000 hours of community service in the city’s 9th Ward, reminding store managers how citizenship and ESG are core values for Starbucks, and a yardstick for measuring personal and corporate achievement.
Although the New Orleans conference and other ESG-related activities were just part of the company’s turnaround, Shultz believes they were a catalyst that helped people think differently and inspired them to find new and innovative ways to serve customers and improve the business.
And the results are clear, with the company’s share price increasing by more than 500 percent from 2009 to 2012.
Higher Profits With Greater ESG Commitment
Companies that continue to treat ESG issues merely as compliance could be missing an opportunity to be rewarded for the good work they do, making it harder to attract the customers, talent, and capital that are crucial to value creation. Their strategy can be shaped by their competitors who have already embarked on the journey to greater integration of ESG into the business.
More and more companies today are undertaking environmental and social efforts to complement traditional business activities, using these efforts as catalysts to improve everything they do from innovation and customer relationships to brand building and beyond. As the Starbucks example illustrates, this can result in higher profits, lower costs and risk, increased shareholder value and a competitive edge.
Embedding ESG factors into core strategy and business practice isn’t just good corporate citizenship – it can be smart business.
About the Authors:
Chris Park, principal with Deloitte Consulting LLP, works to help clients improve shareholder value through better environmental, social and sustainability performance. As lead principal for the Sustainability & Climate Change offering, Chris leads the portfolio of consultative offerings for companies to improve sustainability, social and environmental performance, corporate responsibility, energy and climate change.
At Deloitte, Dinah A. Koehler leads research on sustainability on topics, including materiality of environmental, social and governance (ESG) issues, their valuation impacts and measurement; corporate ESG strategy; social media dynamics and communicating on green messages to the consumer, including eco-labels. She has advised Harvard and Wharton on academic programs and research databases related to enterprise sustainability. Before joining Deloitte, she worked at The Conference Board, the EPA’s Office of Research and Development and Wharton.
As used in this document, "Deloitte" means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.