Environmental, Social, and Governance – ESG is the New ESP
ArticleTuesday March 9
Harvard Business Review published (January/February 2021) an article How to Talk to Your CFO About Sustainability (https://hbr.org/2021/01/how-to-talk-to-your-cfo-about-sustainability) written by @Tensie Whelan and @Elyse Douglas, both associated with the NYU Stern Center for Sustainable Business. This excellent article opens assuming a universal commitment by corporations to some level of environmental, social, and governance (ESG) activity. It further suggests a universal impression most Chief Financial Officers (CFOs) view such commitments as “a cost rather than a source of value.” This impression resonated with me as a resilience and risk practitioner. It also reminded me of the incredulous, Chris Farley-esque, self-head smacking endured every time a C-Suite or Senior leader referred to my line of work as an insurance policy. Nope. Nope. Nope. It’s directly linked to value…directly. Did I mention directly linked? In actuality, Ms. Wheland and Ms. Douglas present an amazingly similar, basic, longstanding issue: how do we influence investment on things that are good and right, not simply because of the bottom line. But isn’t the bottom line good and right?
Earnings Before Interest and Taxes (EBIT) and Return on Investment (ROI) and other normal decision-making metrics have been used in modern day business to cut fat, streamline investments, and realize as much revenue and profit as possible. I submit there is nothing wrong with that. This is the means by which we all benefit and share in the potentials and promises of capitalism. I suppose ESG however is the great “equalizer” whereby capitalism meets stewardship with all a business has vis-à-vis its influences, core values, and/or impacts. But I also submit that risk and resilience are the tried-and-true means to convince CFOs and other naysaying Officers to invest in ESG. Risk and resilience provide the Extra Sensory Perception (ESP) giving foresight to investment…data that is real, not just foretold.
The article outlines “nine drivers…”, or “mediating factors,” …of corporate financial performance” included in the sustainability calculus: innovation, operational efficiency, sales and marketing, customer loyalty, risk management, employee relations, supplier relations, media coverage, and stakeholder engagement. These should come as no surprise and are spot on. However, when applied with the authors’ “Return on Sustainability Investment” (ROSI) methodology there is a powerful outcome of related to “sustainability-related financial performance in real time.” Further, they outline a five-step process:
1. Identify your current sustainability strategies
2. Identify the related changes in operational or management practices
3. Determine the resulting benefits
4. Quantify the benefits
5. Calculate the overall monetary value
A self-evident claim in the article is “as the links between sustainability and economic performance become clearer, pressure will mount from investors, boards, and executive leaders to track and report the payoffs.” Drawing from the nine mediating factors, I would draw attention to one “mitigating factor” therein: risk management. Quantifying risk is probably the most direct route to a CFO’s ear, and black and white financial sensibilities to help them see the light. In fact, Covenant Park (www.covenantpark.com) has suggested the following five steps towards resilience (December 2020, Rock Around the Resilience Wheel) regardless of sustainability, social, or any other mediating factor:
1. Know what drives your value and the specific roles your people play in that.
2. Know what threatens them, how they are vulnerable, and what it would cost you if you lost them.
3. Prioritize the risks to your people based on this understanding.
4. Decide, looking together at this picture, on how to invest in ways to reduce that risk.
5. Achieve your goal of continuing to drive value in an ever-changing environment.
Quoting from UCLA (https://www.sustain.ucla.edu/what-is-sustainability/) referencing sustainability: “Sustainability is a complex concept. The most often quoted definition comes from the UN World Commission on Environment and Development: “sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”
In the charter for the UCLA Sustainability Committee, sustainability is defined as: “the integration of environmental health, social equity, and economic vitality in order to create thriving, healthy, diverse and resilient communities for this generation and generations to come. The practice of sustainability recognizes how these issues are interconnected and requires a systems approach and an acknowledgement of complexity.”
Sustainable practices support ecological, human, and economic health and vitality. Sustainability presumes that resources are finite and should be used conservatively and wisely with a view to long-term priorities and consequences of the ways in which resources are used.” In simplest terms, sustainability is about our children and our grandchildren, and the world we will leave them.” — I dare say this is not always clear to a CFO who is managing the immediate resource management priorities of single lifetime priorities.
Sustainability is a laudable goal and emerging “practice” among the largest, most influential, and deep pocketed corporations worldwide. Resilience is also an emerging practice which applies a holistic perspective to risk and identifies and justifies mitigative actions. So, riddle me this Batman: when will resilience incorporate sustainability as a priority requiring resources for mitigation? Will corporations pay lip service to making a better world for our grandchildren or simply fall back to unquestioned “bottom line” rationale? Will shareholders, customers, employees tolerate costs associated with sustainability? Who defines a company’s “value”? I agree with the authors and took all this time to simply say: those of us that are resilience practitioners need to integrate emerging sustainability risks to provide decision makers a complete perspective beyond compliance. Doing so allows sustainability issues to be addressed in corporate governance alongside the full spectrum of risk, in a way that even a CFO can appreciate. Resilience does not need a crystal ball to prepare for the future as it is blind to the catalyst…and ready for all things anticipated, and unanticipated.
Author: Curtis Bartell is the President and CEO of Covenant Park Integrated Initiatives, Inc and Managing Partner of Covenant Park Preparedness Systems Integration, LLC.
Originally published on LinkedIn.