This blog is from July 15th, 2020. In 2022, companies have begun to implement proactive ESG practices, however, there is still room to grow. See below for the importance of leaning into developing ESG practices.
When it comes to the environment, social, and governance (ESG) practices in your company, are you leaning in and playing offence, or do you have a defensive posture?
So much of what leaders achieve stems from their attitude. Your company is built on passion and values. Your mission may be to create shareholder value, but this does not describe the foundation of how your company operates, your attitude?
Investors have traditionally focused on rewarding you for the innovation of things, what you produced, and what you grew. Today we see investors more interested in rewarding you for the innovation of the way – how you work and how you make decisions. Do not be mistaken, without continuing innovation of things you would not be able to accomplish the dramatic changes that are required in the way you do things.
Over the 34 years of my career, I can put almost every organization into one of two groups, based on their attitude. The first group plays offence, incorporating their values and passion into their business strategy. ESG is seen as an opportunity to engage stakeholders in a dialogue about the way they run their business. The second group plays defence. They treat ESG as an afterthought to their strategy and it feels like they are always on their heels. ESG appears as a burden, speed bump, or roadblock.
Being an engineer, I am not going to venture out and try to explain the psychology behind these two very distinct ways of operating. My thoughts are based on years of working in organizations in each group. My observations are clear.
You will be far more effective at generating shareholder value if you are playing offence. As always, investors will first look at your ability to create value, financially.
Annual reports and financial statements tell stakeholders your story of value creation. This story is credible because it is based on actions and results that have already happened. It is told within a framework, or protocol, that ensures the quality and accuracy of the information.
If we look at ESG through the same lens, the narrative about how you run your company will also reflect actions and results that have already happened. It must be supported by transparent and accurate data that is credible to stakeholders. This is where any one of the many ESG protocols plays a role. Just as your cash flow and revenue numbers are framed in accounting standards such as International Financial Reporting Standards (IFRS), so too is your water use counted under the rules of a known ESG standard, such as GRI (Global Reporting Initiative), essentially a rule book for sustainability reporting. Each standard and there are several in ESG reporting standards, provides stakeholders information on how your business operates. These protocols provide stakeholders with a level of quality assurance with respect to your narrative on how you operate.
If you tackle your sustainability report, or your ESG scorecards, like a typical engineer or accountant, you will also miss the mark of an effective offence. While data is numerical, the story must be humanized. This is about values, about why you choose to operate the way you do. You want to establish a conversation with your stakeholders. Spreadsheets and graphs alone will not do this.
Just like your financial approach, the ESG conversation must be incorporated into your business strategy. The values and interests of stakeholders inform the conversation and companies adjust their ESG reporting and strategy just as they do when the market sends a new price signal. It is essential to incorporate stakeholders’ interest in the way you do things to create a compelling and humanized narrative that affirms you are doing things the way they believe is appropriate. Transparency becomes the norm and anyone who questions your narrative will find the supporting data with a few clicks into your ESG table or spreadsheet, just as they do in your financial statements.
It may seem daunting to even start down this path, but all of you have actually been on this path for decades. You follow these concepts on safety. Governance of your organization has been a narrative you’ve told since long before ESG was coined. Narratives with our neighbours in the field have been integral to our business strategies since before I joined this industry.
Lean in, play offence, and take a constructive ESG attitude that ambitiously tells the story of the way your company works with.
Mark provides advisory services related to ESG to organizations across a range of industry and government sectors. Contact him at marktaylor@taylorenergyadvisors.com