Episode 9 (pt2): Company Health Beyond Profit
Luke - Lets switch over to another critical aspect of ESG which is getting the right level of buy in and engagement from your internal team. My sense is that companies are not doing well in explaining the financial risk from ignoring ESG. One Chief People Officer that we spoke to said that if you haven't gone out to hire people with ESG as part of your core values and a key aspect of your company's culture, don't be surprised if people aren't that interested in it. What is your sense of how challenging it can be, for companies to get the right level of engagement from their staff around ESG?
Emma - It’s a really interesting question and one which I probably have two perspectives on - one as a consultant, now running a consulting business and one as a director in a company running a team of people, and trying to embed this agenda across an organisation. What I've seen in both of those roles is that there is a very wide spectrum of people. There are the evangelists who care deeply about environmental issues, or certain social issues or the topic as a whole. And in their personal lives and working lives, they are absolutely focused on championing responsible business, transition to net zero, whatever it might be.
On the other end of the spectrum, you've got people who see it as a fluffy marketing exercise. And in some instances it has been over the last couple of decades. There's a lot of hearts and minds stuff required for the more evangelical end of the spectrum. And then there's a real kind of opportunity to ‘de-fluff’ something that is perceived as fluffy and which will help to engage those that are at the other end of the spectrum. We're dealing with some companies that are high growth, private equity backed, laser focused on the next round of funding or IPO, and it all comes down to commercial and finance, and it's hard nosed. Working with those companies to build an ESG strategy has been really interesting, because it is about the harder edge side of things. It doesn't change the topic, it just changes the way that you articulate it or engage with people on it.
Whereas in the bank that I was on the exec team of, sustainability was purpose focused. It had a real culture of trying to engage its people and invest in them and do good by the communities that it served. A lot of that was by trying to capture hearts and minds, so that there was momentum building behind the overall agenda. One of the tensions that came out was people's expectations for you to be active in certain areas because it mattered to them, versus a lot of the effort from a company level having to be in where it actually mattered most to the company, or to the impact that it was able to create.
One example I can offer from my banking days was where a large group of colleagues were desperate for electric bikes to be included in the cycle to work scheme. And that needed to be addressed at the same time as addressing the need to transition the entire housing stock of the UK to being much more sustainable, non-carbon-emitting, more efficient and better insulated set of buildings, through the mortgages and other finances that a bank can offer. So you've got these two competing priorities; one is hugely macro and can make an enormous difference to the UK as a whole. And the other is hugely important to a group of your employees. And the trade off isn't actually that straightforward between the two, because you need to run both things in parallel, otherwise you lose people along the journey.
Luke - While you can approach ESG quite methodically, in terms of looking at double materiality and gap analysis and so on, you’re still dealing with issues that create and provoke a lot of strong emotions in people, positive or negative. And that has to be taken into account. Going back to my earlier question about whether companies are doing a good enough job of explaining the financial risk element - for the people who think it's all marketing fluff, do you think that explaining the financial risks to their company of not ‘doing ESG’ would them on board, i.e. it isn't just about having something nice to say, at our quarterly earnings or monthly town hall. This is about the long term health of the business.
Emma - Climate change is definitely leading the way in terms of making the hard links between the ESG topic and a company's ability to make money over the long term. There are various scientific scenarios about what our climate will do over the next 50 to 100 years, depending on how well we address climate change and, therefore, how smoothly our economy transitions to being a low carbon economy versus on the other end of the scale. There is data that exists that allows companies to map out a potential range of future weather scenarios and climate economy scenarios. That can be run against their current business model to figure out whether they would be successful or not in any of those future scenarios. And whether, for larger companies, they need to start taking financial provisions against potential future losses. That's where it starts to become really hard hitting.
In banking there is a huge amount of investment in the risk functions of all of the major banks around the world, to build out those capabilities of looking at future climate scenarios and working out how they will affect both the operational business model of the banks (for example their data centres are in floodplains that might be underwater in 20 years time) but more importantly, their customer lending portfolios. All of the businesses and homeowners that these banks lend to have physical properties, or indeed, business models that will be in one way or another affected by whatever trajectory we go down in terms of climate change. That is all starting to come back to being reflected at the moment in slightly separate risk reports, but increasingly, in the actual, current financials of the business in terms of the amount of capital that they need to hold and the provisions that they need to make against future losses. That's really leading the way in a massive change in how people approach it. And it makes it very data driven and very commercial.
Where I think we've got a longer journey to go on is the social, the people aspect, which is a lot harder to measure in such a quantitative way. You can make various statements about employee churn or the ability to attract good talent and retain it. But as a lot of your HR colleagues will know, tracking that cycle to hitting a profit and loss value in the accounts is incredibly difficult. I think there are learnings from the climate side, and the journey that's been on to become much more quantitative and well understood, that the social side of things will probably start to follow. And as people try to measure impact much more (e.g. if I do this, it will have this impact on society) that can be translated into financial value.
As a company, I might invest in a programme to provide computer coding training to ex offenders so that they might be better placed to get a job once they're released from prison, and be reintegrated back into society. From this investment you can start to track the societal value from lower reoffending rates or successful applications for roles. You can also track the taxes they then pay that go back into society. So you can start placing financial value at different stages of the journey for different programmes or initiatives. And that might not be going into a company P&L, but its a real genuine financial value to society that has been enabled from the original investment.
I think that when people talk about social impact, the expectation will be that they become much more scientific about the way that they're describing it. Because otherwise, it can be seen as hot air, a bit like the greenwashing statements of yesterday that are now being hugely cracked down on. So really, companies have to be able to produce that audit trail of how they've valued something, in order for it to be accepted as a valid statement about their brand.
Luke - What are the most important developments you see in the near future in the ESG space? Is it more regulation or more money? Is it some of the things that you've spoken about in terms of tools?
Emma - Probably all of the above, and some more. Over the next little while, definitely more regulation. There's a lot coming out over the next year or so about reporting, legislation, regulation. They tend to hit larger companies first, but we are seeing certain things flow down the company size hierarchy. Increasingly, it's becoming something that you need to be aware of, regardless of the size of the company that you own or work in. As part of that, I think we're going to see a lot more rigour being imposed on the way that companies look at and then communicate their transition plans. By that I specifically mean the transition to a Net Zero economy, which the UK has got targets to achieve by 2050. I think we will continue to see an uptick in legislative action against things like greenwashing, but potentially starting to flow into the social side of things a little bit more.
Environment has enjoyed pole position on ESG for some time and for good reason. We advise companies that it's very important not to become blinkered on that, and to make sure that you are always looking at the social side of things as well, because it's only a matter of time until something surges up the agenda which could really catch people out. I think with the cost of living crisis, and post COVID, employee wellbeing is going to continue to move up the agenda over the next year or so, particularly as the UK economy potentially goes through a mild recession. How are companies supporting their consumers and their employee base to make sure that they are being well looked after?
There's a lot of exciting stuff in this space as well. It's not all about the risk management side. We see a lot of very, very cool technology advancements and startup companies and clever sort of breakthrough approaches and business models that really bring to life what the future of a much more sustainable economy with much more sustainable business models, might look like. There’s a lot to be excited about, whether you're a large company looking to integrate some of these technologies, or whether you're just a consumer that's looking for what other exciting things are coming through.
Luke - What would be your key message to companies looking at the ESG space?
Emma - Don't let the breadth of the agenda or the fear that everybody else knows what they're doing, or is doing a huge amount, put you off. Take a very big step back and look at it like you would any other issue that your business cares about or is interested in. Break it down into small straightforward steps. What is it that matters to the company? What is it already doing about those things? What might it do more of? That's the best way to get started and everything else can be built on those foundations. But do not let the hype and the confusion around ESG put you off taking a look at it and starting to do something.
