This week sustainability shockwaves rippled through the investor community when Scottish Widows announced it would divest at least £440 million from companies that have failed to meet its environmental, social and governance (ESG) standards. But the finance company’s news is merely a small wave in relation to the huge sea change in attitudes to ESG.
Just as a rising tide lifts all ships, doing the right thing in business is linked to stronger returns across almost all metrics. Consumers increasingly favour companies that support diversity, equality, transparency and sustainability. As do stakeholders across the board. So what are business leaders doing about it?
A new wave of savvy entrepreneurs in particular is on the case. From ESG pure play brands like Meatless Farm to start-ups committed to doing good for the world such as Prevayl (full disclosure: I’m a co-founder). For these leaders, making a positive impact is a driving force. Over the last five years there has been a flood of VC funds focusing on startups in the ESG space alone. But clearly not everyone is getting the hint, otherwise the likes of Scottish Widows wouldn’t need to make such a dramatic decision. So how do you turn the ESG tide in your favour, whether you’re a startup or an established company?
As an investor and founder of several successful start-ups, two of which I sold to FTSE-listed companies, I’ve led and advised companies throughout the business life cycle. From a day one company founder to an executive management board position on a mature FTSE-30 corporation, I have a unique understanding of how to develop an ESG strategy. There are four key pillars of implementing an ESG leadership strategy: values; visionary leadership; culture; and diversity.
To successfully implement an ESG strategy, you must commit to doing the right thing. A business doing good is good for business, and according to McKinsey, is in fact linked to higher returns on almost all metrics. Strong governance of those values is critically important. Once-flaming hot fintech, Wirecard, had its dream of tech unicorn success extinguished this year when its balance sheet fraud was detected.
To avoid that scenario, startups can bake values in from the start, but mature companies – that haven’t yet done so – can reinvent them. Finland’s Neste, for instance, founded as a traditional petroleum-refining company more than 70 years ago, now generates more than two-thirds of its profits from renewable fuels and sustainability-related products.
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ESG is countering the tsunami of damage inflicted on the planet during decades of rapid economic development. But the riches from that development have left many companies afraid to let go of the past and risk losing a surefire moneymaker, damaging or not, that’s already there. Huge household name brands like BMW, which once prided themselves on innovation, are now named as the worst ‘greenwashing’ offenders.
Rather than lead on electric, they instead chose to protect their fossil fuel market for as long as possible. Brands that lead from the front on ESG will be the winners in this changing environment.
The only way to win with ESG is to put it at the absolute heart of business strategy. You must take a holistic approach and link it to holistic stakeholder management. Take Google’s parent, Alphabet, one of the top-rated companies for ESG. Its culture and stakeholder engagement is built around doing the right thing but it does this by creating a culture of risk taking and investing heavily in experiments to change the world for the better.
According to a Boston Consulting Group report, diverse teams perform better in the long-term, both in terms of innovation and improved financial performance. As a former FTSE-30 company diversity lead, I’ve seen first hand the impacts of this. If you look at the top FTSE CEOs, it’s not a very diverse group, so they don’t get the fresh thinking on topics like ESG that comes with a diverse workforce. Transforming that is vital.
Written by David Newns, serial entrepreneur and investor.