p>Sustainability reporting, also known as environmental, social, and governance (ESG) reporting, has steadily grown in popularity over the past two decades. More and more investors and customers alike want to know what their brands are doing to help make the world a better place. In fact, it's estimated that around 90% of S&P 500 companies publish ESG reports.
As more and more companies shift to ESG reporting, they often have to reconcile questions about their brand strategy. The critical questions raised in ESG discovery often lead to bigger questions about their company as a whole: Who are we? Are our mission, vision, and values aligned with business goals?
In this episode of Solving for B°, our experts are joined by special guests, Kaitlyn Allen, CEO of Global Affairs Associates, and the COO of Global Affairs Associates, Amanda Hsieh, to discuss what ESG reporting is, how it ties into the long-term viability of companies and the strength of their brands, hidden values within the ESG process, how to get started and what the future holds for ESG.
*This transcript has been edited and formatted for readability.
How Does ESG Reporting Tie into Long-term Viability and Brand Strength?
Chris: I want to ask about the connection between ESG reports and brands. Specifically, I want to know how does ESG reporting tie into the long-term viability and overall strength of a brand?
Leigh Anne: Well, first you have to decide what a brand is. At BrandExtract, we love trying to do that. A lot of times we'll come back to the fact that a brand is a relationship between a customer and a company.
Bo Bothe, our CEO, will often say that it's not only just that relationship, but it's the perceived relationship on the part of the customer. Whether that customer is a stakeholder, a consumer, or a B2B relationship that you've got going on, I think that it's important to understand that a brand is kind of squishy. It's a dialogue and a conversation.
I have certain values and ESG reporting allows me to align myself with certain values and other things that have those same values. ESG reporting, in my mind, gives you tangible data to the intangible asset that is your brand. So, it helps, not only support your brand, but it can also influence your brand and transform your brand.
The Tangible Benefits of ESG for Brands
Chris: What are some of the tangible assets? Because as you mentioned, there's that fuzzy, touchy-feely thing that we all think of when you think of a brand -- you can't quite put your finger on it. But from a business standpoint, ESG reporting is valuable. I was wondering if you guys can talk about that particular side of things?
Amanda: Something that I want to mention, and tagging onto what Leigh Anne said, is that stakeholders are really expecting radical transparency from customers. Investors are basically passing over companies who are not disclosing anything because it is very quickly becoming standard.
I think the other thing to think about too, is also your employees. That's another big stakeholder group. There have been a couple of surveys done, and depending on the survey, it's anywhere from 75% to 86% of millennials say they'll take a pay cut at a different company that aligns with their values more. That's important to have if you want top talent working at your company. I think ESG reporting can also help, of course, with everything that you mentioned Leigh Anne, but also attracting and retaining those really smart kids.
Kaitlyn: I think the other dimension there, with ESG reporting, is that it's something concrete, it's something tangible. You can say that you value conservation as a company, but if you're not actually employing practices in your operations that reflect that, and then communicating that directly -- whether it's an involuntary report or in evergreen web content, or whatever that communication channel is -- people don't know that.
I think ESG reporting, in a way, is one communication channel. It's a very important one, but it's one of the many ways that companies can communicate and strengthen their brand.
Almost every time that we do any ESG reporting plan for a company -- where we take time to set a vision and strategic objectives for what they want to achieve with an ESG report -- almost always, issues related to brand come up in that process. Issues like, "Oh, well, we weren't thinking of this as an employee engagement tool. But now that you say it, we're having a really hard time recruiting people."
In terms of recruiting for construction and energy and manufacturing, for a lot of the B2B clients, that's been a tough problem for several years now. When folks graduate, they want the Amazon jobs, they want the Silicon Valley jobs, the cool, sexy technology stuff. But manufacturing companies need that talent. Oil and gas companies need that talent. What we've heard clients say is, "We used to be competing with each other for talent, and now we compete with Amazon for talent." Amazon just being one example.
I think ESG reporting can help answer some of those questions that prospective employees and other groups or stakeholders might have and might not understand about your industry. It can help answer some of those questions, and at least be a conversation starter, if nothing else.
Leigh Anne: It goes back to that "relationship is everything," doesn't it? When we talk about aligning our values or finding similar passions. Those millennials are practicing what they preach, not only from their own employment, but also from their investment mindset. I think that BlackRock said something to the effect of " Look, just FYI, all of the millennials are asking us about ESG funds and sustainable investing." It's a different mindset. It's not the mindset of my dad from 20 years ago.
Chris: Yeah, and on the heels of Millennials are Gen Z, and that generation is going to be even more swayed or impressed by ESG reporting. It's going to become table stakes in order to attract that talent.
Amanda: I think that's why we're quickly seeing. It's not only for attracting talent but also in attracting investors. Some disclosure or statement about how you're managing these risks is what you have to have it just to get in the door nowadays. If you're not doing it, I think investors are passing and you're potentially losing the ability to access the capital you need for your growth or expansion plans at an affordable rate.
I think when we talk about how ESG reporting can support the long-term viability of the company, we can also talk about how what gets measured gets managed, right? There's a lot of risks involved in the business; environmental risks, safety, whatever is applicable to your business. I think if you're publicly reporting on your safety data, for example, your environmental data, it gives that extra push to make sure you're performing as you should.
Chris: Yeah, and you're holding yourself accountable.
Risk Management and ESG
Kaitlyn: When we talk about environmental, social, and governance-related issues, the line of what's financially material and what's not financially material has blurred significantly. As more and more very serious and influential global financial institutions begin to consider certain industry-specific ESG risks to be financial risks. And that's a direct quote from the latest BlackRock CEO letter in January of 2020 this year, "climate risk is financial risk."
The more that idea becomes mainstream, the more that these issues are not going to be optional to evaluate, measure, and report out. I think that speaks to the sort of risk management perspective of ESG, which people I think sometimes confuse ESG investing with impact investing. Impact reporting is like seeking a specific positive societal environmental impact, while ESG simply being another layer of screening for your investment, another layer of risk assessment.
So, if you consider ESG risks, you consider additional risk screenings, and you, as a company, look at what material ESG risks could impact the long-term viability of the company, what you're going to get is a stronger company. You're going to get a company that understands the full picture of the risks it's facing and will face soon if you haven't already come across them, like in the case of climate. I think it's long-term hedging of risk when you really take these issues seriously.
The upside is that a solid reporting regimen can really contribute to operational efficiency. It should contribute to other opportunities and maybe potential sources of revenue that had been considered "back burner" things. You can bring those to the front burner. Then of course, most importantly for this conversation, really giving you that extra bump for your brand.
Tailoring Your ESG Report to Your Brand
Leigh Anne: Kaitlyn, the other day you were talking about how one size doesn't fit all. I think that that's important to talk about in terms of ESG reporting; what's right, what's material for your company and your stakeholders, and how that plays out.
Secondly, I think what's important is that when you talk about good ESG reporting, you can tell which brands have a plan because they've got great ESG ratings, and they have great brands. When you think about all of the A-listers out there, (Procter & Gamble, Home Depot, etc), they all know who they are.
I think Target just came out and they have a very good sustainability report. I don't know what their rating is, but I really enjoyed reading it. I like their approach to their employees and to their community at large. But it's not something that's cookie cutter. It has to be custom to make it really worthwhile, right?
Kaitlyn: Yes, absolutely. I think you bring up a good point. A lot of these brands that are A-listers are consumer brands. Target's a consumer brand. Microsoft is a consumer brand.
When we talk about B2B companies, and particularly industrial sectors or manufacturers, we have clients that make modern life possible, but no one knows who they are, even though they're huge international companies. That's one of the factors that you have to look at.
Obviously a company that's in that space and is not a consumer brand doesn't need to do the same type of report that Target does. They shouldn't. We wouldn't recommend that for a company like that.
I think, Leigh Anne, you're touching on an important point, which is it's not one size fits all, and it's very important for each company to determine what their right size is. To take that time before they say, "Oh, I need an ESG report. Give me your basic plan."
In some cases, you're meeting them where they are and we're open to having conversations, but we're always going to tell our clients, "It is so important to step back and ask yourself what you're trying to get out of it." Then also potentially, identify other additional benefits such as brand, culture, recruitment, and retention and make sure you're getting the most bang for your buck. You might as well get the most value out of it you can.
Leigh Anne: Yeah. Amanda said yesterday, "There's no point in doing this and investing all this time and effort and money if it's not genuine and real, and if it's not doable or achievable."
In terms of producing a report, if you can't possibly produce a 65-page website that's interactive with dynamic data, that's okay. I think that what's important is to not only meet our clients where they are, but also assess where they could go, and whether or not they need to go that way.
Kaitlyn: Totally. I think that's part of the multi-year approach and the iterative approach to this. We're always talking about the agile approach (to borrow something from tech). This is a process. And by the way, the voluntary frameworks are changing all the time. Just this week, GRI and SASB, the Sustainability Accounting Standards Board and Global Reporting Initiative, announced a decision to collaborate and sort of bury the hatchet, so to speak.
How will that impact the framework that you're expected to use or not use? That's why you have to be agile, get feedback from your key stakeholders, and adjust as you go along. Unless you're a big consumer brand that has a really big need to come out in a big way with a big splash, then taking baby steps can be a really smart way to make those investments and get that immediate feedback and be able to immediately improve as you go.
Amanda: We always talk about ESG being a journey, and whether you're taking the very first baby step or a big jump, or you've been doing it for 20 years, it's a journey. There's always something more to do. Things are always evolving. The target is always moving.
So, what's important is, going back to what we were talking about, taking that moment to think and plan in advance. It's really identifying what your vision is, from the beginning, for increasing our transparency. What are your strategic goals and what are those guiding principles or pillars around ESG reporting?
The tactics may change. Maybe it's not SASB anymore. Maybe it's a combo with a really long acronym. Whatever it is, make sure you know why your company is doing it and what you want to get out of it.
The Hidden Value of the ESG Process
Chris: One of the hidden values, as I'm learning more about this, is that the process seems like it forces you to see things in a different way or uncover certain things about your company that maybe you didn't see before. Is that true in your experience? If so, is there anything, in particular, you guys find that this process brings out?
Kaitlyn: I definitely would say, yes. It's interesting to have these conversations with folks like you, that work in a similar space. We do complimentary things. We were just talking about, the other day, how almost always, when we're starting with a first time ESG reporter, almost always the question of culture and brand come up.
Often ESG reporting is like the fire that they're calling you for. "There's a fire! We need a report!" But then, as you start backing out, you're like, "Okay, yeah, there's a fire, but there's also some structural issues." We can help put the fire out, but we're going to also start talking about the structural issues, and some of the big ones are brand and culture and values. As you go along this process, a lot of other things can come up, and I think they often inspire more discussion and more focus and attention as a result of the ESG reporting process.
Leigh Anne: Yeah, I would agree with that. I think that the clients that we've worked with are all pretty savvy in terms of marketing and in terms of understanding their place in the industry. But there are some that we've had conversations with that start to struggle when they're trying to align their internal goals. And because an ESG report, by its nature, is transparent (or should be transparent), I see companies struggle with trying to figure out who they are, how they talk to each other, and how they talk to their customers as well.
I don't know that I have an answer to your question. It's all custom in that regard. It depends on the client, and it depends on what the issues are that we uncover. But inevitably, when you start looking at these issues, societal issues, governance issues, you're going to uncover things. It's great because, back to what Amanda said, "What gets measured gets managed." I think that once you acknowledge, "Okay, I might have a problem here," you can fix the problem.
Kaitlyn: I think another little thing I'll add to that is a lot of first-time reporters are afraid of the performance side. "Uh, it's the first time we've measured our diversity numbers and it's not good," or, "It's the first time we've measured GHG emissions or water usage and it's not good." But transparency is more important than performance in this world.
In the world that we're working in, transparency and admitting, "Yes, we recognize there's an issue here, we're taking these steps to address it, you'll get an update in our next report." That's much more valuable than silence because I can guarantee you that, even if you don't report it, as long as it's not the tiniest niche industry ever, the analysts at MSCI, Sustainalytics, they'll make their own calculations, and they'll guess where you fit. You might as well be transparent and have the control over what data is out there and that narrative than allow a third party to basically guess for you.
Chris: That's a great parallel with branding, honestly, because we always say, "you don't own your brand, you manage it." If you're sitting out of the conversation someone's going to fill in the gap for you.
Leigh Anne: That's exactly right.
Chris: This is part of the process of managing the brand, saying, "Hey, here's our transparency, this is what we're doing." If someone else out there that's pulling together data is estimating what we're doing and we don't correct them, then they take control of our narrative and they can take control brand.
Leigh Anne: Yeah, and that's daunting, right? That's hard.
I think about the different persona profiles that we talk about in terms of our end-users at BrandExtract, our customer base. Whether it's a CEO, CFO, Head of Sales, Marketing Manager, they may not have a Director of Sustainability at their company, and they may be the ones that, in their eyes, drew the short straw and have to do an ESG report. They don't know where to begin.
It's such a daunting task. Then if they go and look at all of these analysts and the ratings and rankers of the world, they may say, "Oh my gosh, we can't afford to use the company that has 10 offices globally in Hong Kong and London. What are we going to do?"
There are people out there to help them, like on this podcast. Don't be frightened of it, be empowered by it. It's okay.
It's like, "Well, we're going to march through this and we're going to do what we can, and we're going to learn from it." Because I guarantee you, you won't regret it. It is not wasted.
Kaitlyn: It's not wasted if you take the time to set out your goals before you start. I think we saw a lot in the 2010s and part of that was that there weren't many options.
GRI, the original Global Reporting Initiative that was founded in 1997, was designed to meet external stakeholders' needs. Specifically focusing, not on the financials and not on the investment, but on society, and your company's impact on society.
As the 2010s came along, a lot of companies, I think, found that they weren't getting the value out because they were having five downloads of their report. So those programs got cut. Unfortunately, they weren't always replaced with something more fit-for-purpose.
But now that we have so many options, there's no need to assume, that you have to do this huge, huge report. Maybe that's right for your company, but maybe it's not. If you take the time to set the strategic objectives ahead of time and understand what you're trying to achieve, there are plenty of options now to help increase your ESG transparency without going overboard.
I'll just add one more thing to that, and that is that ESG disclosures do tend to be done by larger companies with more resources. We, as a boutique firm recognize that, and we don't want all of these small and medium-sized businesses to lose out on this game. To lose out on the winnings because they're smaller, and might not be able to afford a big four firm to help them with this particular topic.
Boutique firms like ours are there to serve that need and help them through that iterative fit-for-purpose process so, they don't miss the boat.
Leigh Anne: So, it is inclusive, right? One of the pillars of ESG, inclusivity, and I think that everybody can do something.
The Future of ESG
Chris: You talked a little bit about where we started and then in the 2010s, how things kind of evolved and maybe even devolved a little bit. Now here we are in 2020. I want to ask you guys, what is the future of ESG? What do you guys think is the next step, and what does it look like? Do you guys have any thoughts or opinions on that?
Amanda: Yes. We probably have many.
It will become mandatory at some point. It's a matter of time. We see it's already becoming mandatory in Europe and in other parts of the world. We see our own SEC inquiring and having requests for comments about ESG fund names. We see our Department of Labor proposing new rules about ERISA, about ESG funds, but it's not very clearly defined what an ESG investment is. That's going to have to be defined someday. It's a matter of time.
Is it two to three years out, is it five to six to seven? We don't know. But at some point, it will become mandatory.
Kaitlyn: And even if it's not legally required, the markets are following the money. I think there's still a misperception out there that with ESG you have to take a hit to your profits. The opposite is the case. You can go to look at Morningstar, look at MSCI, look at all of the indices out there, check out the Bloomberg terminal. You can go see for yourself that the majority of ESG funds are outperforming their benchmarks.
Now, we can have a debate about why. That's a whole other conversation, but the point is people see money, people see profit. People see alpha being generated. They're going for it.
Even if it doesn't become a regulatory requirement, the markets are already headed that way. One of the studies that just came out this year was that Deloitte projected, just based on current growth for the past few years, that ESG assets could make up half of all assets under management in the US by 2025.
That's only five years! And that came out before COVID. That might be accelerated because what we've seen since COVID is an acceleration of this as well. It's going to get there as a requirement, at some point but the markets are already headed there.
Leigh Anne: Yeah. That train's already left the station, I feel like. It might've started originally in Europe, but we've certainly caught up.
Kaitlyn: We're catching up.
Chris: And you guys alluded to it, this is something that's evolving in real-time. You talked about the SASB ann GRI merger.
Kaitlyn: Yes, but it's not necessarily a merger. Just a statement that they will collaborate.
Chris: ...which is what we announced earlier!
Amanda, did you have something else to add about the future of ESG?
Amanda: Yes! I think another trend that we're seeing, that I think will become the future of ESG too, is more dynamic reporting. We're used to having this annual report that comes out and talks about the annual process. But I think, like anything else, that investors and other stakeholders are wanting more frequent updates.
Using an example we're seeing ESG mentioned more often in quarterly earnings reports, especially with fortune 500 companies. That's a trend that more and more companies are starting to jump onto. Who knows what the future will be with this, but I think, yes, there's still a place for that annual sustainability report to talk about what you've done over the year, but I think just like with financials, investors and stakeholders want to know more in real-time what's happening.
Leigh Anne: And live reporting, real reporting that what you can change and update. This goes into your area of expertise, Chris. When we talk about findability and searchability, that live HTML text on the page when we're talking about an end deliverable. We live online, we're doing this online. That's where you need to be.
I hate to sound like a broken record, but sustainability reports should, in and of themselves be sustainable. So I wouldn't print it. I would prefer that you have something online or something in the cloud that I can access.
Kaitlyn: Well, that's true in the US, but in other markets, for example, working in rural India or something, you might want to have some paper copies in the local language that your employees can access. But yes, I agree with you that, in general, if you're operating in the US and that's your primary audience, go online.
That's why it's so cool to hear about the tools that BrandExtract has developed, to basically allow the non-technical user to go and do their own live updates in your content management system. So it's not something that you have to depend on someone else to do. I think that's such a cool tool to enable more frequent reporting.
These are discussions that a lot of folks in corporate sustainability are familiar with, sort of the annual versus the live report. But I think, as Amanda said, it's sort of a balance and it's your needs. There's always going to be a desire to see year-on-year data for comparability, but I think there are certain things that can, and could simply be live tickers on your website. Or live-updating numbers that add interactive elements as well, from the brand and the culture perspective. And also for that 'cool' factor, which is important for companies and industries that are perceived as not cool.
Where Do You Start with ESG?
Chris: This has all been really great. I have one last question, and I want to go to each one of you here and give everybody an opportunity to answer this. So, for the listeners out there who may be considering jumping into ESG and haven't done it yet, or feel overwhelmed by it, I'd like to get a tip from each of you guys, or just kind of some advice.
What would you tell that person who is considering it, or is like, "Okay, we're going to do this, but where do we start?" Can you guys each provide one or two tips?
Kaitlyn: I will always say, start with what you want to get out of it. "What are you trying to achieve?"
Leigh Anne: Yeah. "What does success look like to you for this? "What is your vision? What defines success for this report or this project?" That's what I would say.
Amanda: First, I'd say, "You've made a smart decision. Go with it. And if you feel uncomfortable, there's help from Global Affairs Associates, from BrandExtract, and I'm sure there are other boutique firms out there as well. There's a lot of people who want to help you."
"You made the right decision, whether it's internal or external." I think as Kaitlyn and Leigh Anne said, "What do you want to get out of this, or what's your vision? And don't be afraid to seek help."
Chris: Awesome. And a couple other things I wanted to mention too because we talked about this yesterday, and you guys talked about this throughout the podcast, but understanding that ESG is a journey. And to do things that are going to be authentic to you and that are relevant to your business, as opposed to just doing it, just to do it.
I want to thank you guys so much. Kaitlyn, Amanda, Leigh Anne, this was awesome. It was a great learning experience for me. Anybody who's listening out there, I imagine it's going to be an incredible learning experience, for you guys as well. Thank you guys so much. I appreciate your time.