By Jeffery S. Perry

Environmental, Social, and Governance (ESG) are three factors used by major investors to evaluate the sustainability and ethical impact of businesses. The ESG landscape has grown significantly over the past several years and continues to evolve very rapidly. Businesses across sectors are scrambling to navigate the ESG environment in terms of what they actually do across ESG elements and what and how they disclose ESG efforts. For some organizations, this is a very reactive exercise as they try to keep up—a Whac-A-Mole approach. For others, they have the same—or peanut butter—approach for all things ESG. However, authentic ESG is an opportunity to be proactive and lead in areas that are aligned with the organization’s purpose and strategy, shaping parts of the ESG agenda, and having differentiated efforts recognized by investors.

What is ESG? The three factors of ESG were first mentioned in the 2006 United Nations’ Principles for Responsible Investment (PRI) report consisting of the Freshfield Report and “Who Cares Wins.” The focus was driven by major institutional investors further developing sustainable investments. While there are countless definitions of the three factors of ESG, here is a digestible summary from the Harvard Law School Forum on Corporate Governance: 

• “Environmental captures energy efficiencies, carbon footprints, greenhouse gas emissions, deforestation, biodiversity, climate change and pollution mitigation, waste management, and water usage.”
• “Social covers workplace diversity, racial justice, pay equity, human rights, talent management, community relations, privacy and data protection, health and safety, and other human capital and social justice issues.”
• “Governance covers the governing of the environmental and the social categories—corporate board composition and structure, strategic sustainability oversight, and compliance.”

ESG investing is likely to grow. Based on a recent Morgan Stanley survey, 90% of Millennial investors are interested in pursuing investments that more closely reflect the values they hold. This trend will likely continue for Generation Z as well. 

However, ESG is not just an investor evaluation exercise on paper, it is about what businesses do across these dimensions. On the one hand, a business can do as little as possible and react to ESG requirements as they surface from investors or rating agencies, a Whac-A-Mole approach. On the other hand, a business can try to cover all issues across the ESG landscape in a similar fashion, a peanut butter approach. Neither approach is ideal.

Authentic ESG is a more sustainable approach that views the ESG landscape through the lens of the purpose and strategy of the business. This approach reveals areas where the organization can lead and shape the ESG agenda over the long haul. Focusing on areas that are material and core to the business help ensure that they get the required financial and human capital to sustain the efforts over time. While other areas can’t be ignored, demonstrating leadership in specific areas gives permission for the business to be threshold in other areas across the ESG landscape.

From an environmental perspective, most businesses are focused on carbon footprint reduction. This is a threshold expectation across the spectrum from manufacturers to professional services organizations. However, here are a few examples of where businesses can lead in specific environmental areas:

• A business that is related to water may pursue leadership in water conservation
• An agricultural business may pursue leadership in reducing deforestation
• A business that consumes a lot of packaging material may pursue leadership in paper and plastic recycling

From a social perspective, advancing diversity, equity, and inclusion (DEI) efforts are arguably considered threshold. However, here are a few examples of how businesses in specific sectors can lead in key areas that have positive impact on society, especially in underserved communities:

• Financial Services: Consumer financial literacy and credit management 
• Consumer Durables: Homeownership and neighborhood revitalization
• Healthcare: Health and wellness

In addition to general oversight and compliance, sound governance enables environmental and social efforts. The more that these are core to the business purpose, the greater likelihood of commitment over time. The bottom line is that ESG is here to stay. Businesses need to understand and navigate the ESG landscape and identify areas where they can lead in authentic ways.  As notable author and communications expert, Sabrina Horn once said, “Faking it is never sustainable.”