ESG implementation for companies looking to become more responsible

July 2022 | SPOTLIGHT | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

July 2022 Issue

Successful companies across all industries and markets are comprised of individuals who understand that a strong environmental, social and governance (ESG) framework is essential to maximise productivity and to minimise legal, corporate and financial risk. In fact, because customers and potential investors are disinclined to interact with and support companies that fail to proactively address issues in the arenas of sustainability, environmental responsibility, and diversity and inclusion, savvy corporate leaders are laser focused on ESG dialogue and on implementing governance frameworks that prioritise people and the planet, while also driving revenue gains and increasing shareholder confidence and satisfaction.

For companies that are just beginning their ESG journey in earnest, it may be overwhelming to think of where to start. Because the ESG framework is expansive and arguably touches on nearly every aspect of a company, corporate leaders and board executives may find themselves challenged to identify ways to implement an ESG framework initially. To that end, we recommend looking at the following five areas of focus that can immediately drive positive and lasting impacts.

Corporate citizenship

Corporate citizenship relates to the policies, procedures and practices of a company and how they all combine to meet the legal, ethical and fiscal goals that have been established by shareholders and adopted by corporate leaders and executives. One can think of corporate citizenship as a company’s collective obligations and responsibilities toward the greater community. Corporate citizenship is a great area to focus on because investors have made it clear that they will actively look for companies that behave as good corporate citizens.

There are many ways to implement a corporate citizenship programme successfully, but to do so, a company should look at ways that it can tailor such a programme to its broader mission and vision. Doing this requires thoughtful reflection about what a company is doing and how it can do that more intentionally, responsibly and ethically. A well-known company that sells coffee globally was able to establish a robust corporate citizenship platform by focusing on the ethical sourcing of its coffee beans, creating and supporting a diverse and global network of coffee bean farmers, implementing and executing a strategy of transforming its storefronts into green buildings, and encouraging its employees to contribute significant time supporting community service initiatives. These efforts combined to create a corporate citizenship framework that was appealing to investors, employees and consumers, equally.

Procurement and supplier diversity

Companies looking for ESG wins must consider their procurement policies and procedures and ensure that they support supplier diversity, which is the purposeful inclusion of diverse suppliers when opportunities to bid on contracts arise. Supplier diversity can be thought of as the combination of corporate programmes, intentional outreach and procurement actions that encourage the sourcing of supplies and services from minority-owned, women-owned, veteran-owned, LGBT-owned, service-disabled veteran-owned, historically underutilised businesses and non-traditional business vendors. Procurement programmes that focus on supplier diversity can not only have positive impacts on revenue, they can also drive significant changes in company culture and shareholder satisfaction, and can benefit the broader community by enhancing the opportunities available to those who may have struggled to obtain access to business opportunities historically.

A popular retail store that decided to focus on intentionally increasing its supplier diversity in conjunction with evaluating its overall procurement programme found that its revenue and resale product quality increased when it expanded the list of suppliers that it had traditionally relied upon to include more diverse suppliers over time. Additionally, the company found that the costs of expanding the supplier network was negligible and ultimately increased worker satisfaction among employees that were assigned to the procurement division.

Executive accountability

It is not enough to simply set certain goals related to ESG. A company needs to implement ways to ensure that corporate leaders and executives work toward achieving these goals by prioritising them and communicating throughout the company via senior management. Many companies that have prioritised ESG excellence have made it impossible for the most senior leaders to relegate the responsibility to lower levels or delegate implantation downstream. But creating that sense of urgency at the most senior level requires motivation that is often inspired by creative means of rewarding the innovation that is required to drive change in this space.

A successful financial company that was interested in ensuring accountability among its senior ranks for the implantation of its ESG framework ultimately incentivised them by linking compensation components with the achievement of stated ESG goals. The company found that when it linked bonuses received by senior leaders to annual ESG initiatives like gender pay parity and carbon usage, the leaders were more innovative and successful at meeting and exceeding these goals in some cases, much to the delight of shareholders who valued these initiatives.

Environmental protection

Increasingly, companies are being seen as playing a vital role in the battle against climate change and global resource depletion. Because many companies own or rely on real estate portfolios comprised of office buildings and manufacturing facilities, they can take active steps to reduce the impact on the environment by focusing on strategies that are designed to minimise their environmental footprint and its negative effects. A company that wants to set goals in this area should think creatively about how it can address climate change proactively, which will ultimately attract forward-thinking investors and drive improvements in business processes and practices that may support revenue growth.

There are many ways that a company can approach setting and working toward its environmental protection goals. From simple steps, such as changing out traditional light bulbs for LED lights, to exploring larger changes like establishing relationships with energy providers that produce renewable energy, a company can scale its efforts to minimise its impact on the environment and its contribution to harmful effects on the environment. Some companies have focused their efforts on reducing water consumption by making changes to manufacturing processes, while others have shifted to more conscious methods of waste management and recycling.

Board diversity, equity & inclusion (DE&I)

In recent years, board DE&I, which can be thought of as ensuring that a company’s board more closely reflects the race, ethnicity, gender and diversity demographics of its stakeholders, has been identified as a driving factor in sustained business resiliency, evolution and financial success. Because there are so many significant positives associated with DE&I at the board level, investors are increasingly demanding that companies seek maximum diversity at the highest levels because they recognise that such will improve risk management and corporate innovation and result in increased profitability. Additionally, many jurisdictions have taken proactive steps to increase board DE&I. Some states, like California, enacted legislation that required a certain percentage of board seats be held by diverse candidates, and while these laws are subject to judicial scrutiny, it is clear that many entities are implementing steps on their own to drive change in this area.

In 2021, Goldman Sachs pledged to only underwrite initial public offerings (IPOs) of private companies that have board diversity; additionally, the US Securities & Exchange Commission (SEC) approved a new Nasdaq disclosure requirement on board diversity. Today companies are taking proactive steps to fill board seats through means that draw from a broader, more diverse pool of candidates because they realise that board DE&I and the accompanying diversity of perspectives and experiences results in a dynamic leadership environment where everyone is challenged by differing points of views, which will benefit the company, its customers and shareholders in the long run.

Liza V. Craig, Tyree P. Jones Jr and Jason W. Gordon are partners at Reed Smith. Ms Craig can be contacted on +1 (202) 414 9235 or by email: lcraig@reedsmith.com. Mr Jones Jr can be contacted on +1 (202) 414 9296 or by email: tpjones@reedsmith.com. Mr Gordon can be contacted on +1 (312) 207 2456 or by email: jgordon@reedsmith.com.

Liza V. Craig, Tyree P. Jones Jr and Jason W. Gordon

Reed Smith