“Feel Good” to Best Practice: The People Impacting Your Business Who Care About Environmental and Social Responsibility

Even if you don’t care about climate change and Environmental and Social Governance (ESG) / Corporate Social Responsibility (CSR) in your business, pretty much everyone else you depend on for your business does, from your investors to your customers and everyone in between. It is no longer a personal “feel good” decision to incorporate environmentally and socially responsible practices in your business. It is just good business.

Below are five people making decisions that impact your business, and looking at your ESG / CSR practices while they do it.

Your Consumers

Research indicates that consumers (1) care about the sustainability of the products they purchase, and (2) the social and environmental responsibility of the companies that make and sell them. But more than that, consumers are willing to change purchasing habits, and pay more, based on this information. Here are some key points form a 2018 Nielsen consumer survey and a report by consulting giant McKinsey:

• 48% of U.S. consumers say they would change consumption habits to reduce impact on the environment.
• 61% of Baby Boomers say they will pay more for environmentally friendly products. But a whopping 90% of Millennials say the same.
• 48% of Baby Boomers will pay more for socially responsible products. For Millennials, that jumps to 80%.
• 34% of Baby Boomers say they would pass on a brand in favor of something more environmentally friendly. But look again at Millennials who are at 53%.
• 90% of Generation Z respondents felt that companies “have a responsibility to address environmental and social issues.”
• Sales of sustainable goods in the U.S. are increasing, showing 20% growth since 2014, significantly outpacing the growth of conventional goods, and estimated to be $150 billion by 2021.

The Take Away

John walks into a store. If John is a Baby Boomer, there is around a 50% chance he may choose to buy sustainable Product A over conventional Product B right next to it. If he is a Millennial or a Generation Z, the chance he is going to pick Product A skyrockets to 80% to 90%. And on top of that, John is now enjoying a 20% increase in options of sustainable products on the shelf than he did 6 years ago. In other words, the conventional product not only now has more competition on the shelf, but also now there are more Millennials and Generation Z’ers purchasing. More than that, if John is of the younger generations, she/he is most likely asking her/himself “Who makes this? Where is it made? What is it made from?”

The bottom line is that consumers care about how companies address social and environmental issues, this is guiding their purchasing, and the trend is growing. Companies that do not take a hard look at their own consumer base to understand the trends, opportunities, and potential pitfalls, could be making a very big strategic growth miscalculation.

Your Reseller

So, you determine that you aren’t really selling directly to consumer; you are a wholesaler and not really interacting directly with consumers. This is, of course, a fine line…ultimately the consumer of your goods is the person picking them off the shelf or clicking the “buy now” button. Even if you aren’t looking at the demographics above, you can bet your reseller is, and therefore is scrutinizing your product offerings with that same lens, whether it is the local corner store boutique or Target, they both may want your baby jumper to be organic cotton with no plastic packaging.

Moreover, it is important for wholesalers to understand that major corporations aren’t just asking for this stuff…they have set targets for themselves and are tracking their progress. If you can be seen as contributing towards their goal of meeting one of those metrics, that is a plus…and at some point, may even become a prerequisite for doing business with a retailer, large of small.

Here is a very real example from Walmart’s ESG Commitments and Progress reporting:

• Supply Chain Goal: By 2022, Walmart U.S. stores will endeavor to source apparel and home textile products only from suppliers working with textile mills that use the Sustainable Apparel Coalition’s Higg Index Facility Environmental Module (FEM) to measure and help improve environmental performance.
• Metric for Tracking: Percentage of product sales in apparel and soft home categories sourced from suppliers with at least one facility that has completed the Sustainable Apparel Coalition’s Higg FEM assessment for Walmart U.S.
• Fiscal Year 2020 Tracking: Greater than 65%

The Take Away

You have a big meeting setup with Angela from Acme Retailer. It would be the biggest account you have ever landed and allow you to make that leap in production capacity you have been trying to do for the past three years. There is a very decent chance that Angela is looking at how your product is (1) appealing to certain consumers, and (2) is fitting into their own corporate ESG goals and metrics which she has been directed to consider in her purchasing deals.

Are there certifications in your industry that would be beneficial, or even may be required down the road? What can you be doing to position your business to keep current resellers who are adapting to these trends, and perhaps gain new customers?

Your Employees

If you have ever sat down and looked closely at your financials, you will quickly see that your cost of labor is probably one of your greatest expenses. As a percentage of gross sales, labor costs can range between 20% to 50%, depending on the type of business (e.g. automated manufacturing would be lower, but professional services would be higher). Whatever the expense is for your business, it is significant, and therefore getting and keeping good employees is a critical part of any sound strategy. Today, more than ever, employees care about two aspects of their professional life: (1) does their work have purpose, and (2) is their employer environmentally and socially responsible.

According to a study by Marsh McLennan, “ESG performance can help companies both improve employee satisfaction and attract prospective employees.” The part that should go without saying as well is that satisfied employees are more productive. According to business consulting group Investis Digital and the Wall Street Journal, employees today seek “a sense of belonging and purpose.”

In a study by Cone Communications on Millennial employee engagement, 75% of Millennial respondents said they “consider a company’s social and environmental commitments” when applying. Similarly, 75% said they would settle for less pay to work for a company with better ESG / CSR practices, and 64% said they wouldn’t even take a job if an employer didn’t have strong ESG / CSR initiatives. According to Inc. Magazine, “Millennial leaders — and employees — prioritize social value over financial value.”

As one can see, Millennials are becoming an important component in a lot of metrics that quite possibly impact your business. But more than that, their impact is growing as they mature. They are not only becoming more of the consumer market as noted above, but according to a 2017 Pew Research Center study, they already are the largest pool in the U.S. labor force at 35%, and some estimates suggest they could make up as much as 75% by 2025. And Generation Z is coming up right behind them.

The Take Away

Jennifer has found your posting for a new hire. Based on simple population demographics today, there is a pretty good chance that Jennifer is going to be interested in not only what your company does, but how you operate. She is going to be looking for a company that doesn’t just sell widgets to make money, but sells widgets that improve people’s lives and make a difference in the world. And on top of that, she is going to want to know, just like our consumer John, how your company is doing business when it comes to environmental and social causes. Oh yeah, and if you do hire Jennifer, but she gets an offer from a company with a great mission for a position where she can feel a lot of purpose, she’ll likely walk…even for less pay. Your labor costs just went up again because now you have to replace her.

Your Investors

Now let’s say you have won over John to buy your product and have inspired Jennifer to great heights in her purpose-filled position with your organization. Now you need to expand, but need some investors to do it. Even better, you get a call from the big boys who want to buy you out…

According to an article by Citi, “More and more investors are incorporating ESG factors into their investment processes” and investment companies that have incorporated ESG investment criteria account for $83 trillion in assets under management. In 2019, Forbes referenced Oxford University research that found “80% of mainstream investors now consider ESG information when making investment decisions.” Forbes continues to note that managing social and environmental impact in brands and business operations is becoming no longer a feel-good ideology, but a prerequisite “to compete for talent, customers, and investors.”

For some additional evidence of a changing financial world, S&P Dow Jones recently launched “Sustainably Screened” versions of U.S. core indices, including the S&P 500, S&P MidCap 400, and the S&P 600.

It is likely that there are two driving factors for this move from the investment world. First, investors have realized that customers care and that is impacting their purchasing decisions. As we all know, the almighty consumer is always right. But there is a second component as well, which has been spotlighted by the 2020 COVID pandemic: Risk. COVID has brought into full focus what has been happening with climate change for decades and previewed the future of what a global crisis across international borders can really look like, all in a few months. In other words, the world, and specifically the finance world, saw what happened to companies who were especially exposed to a particular risk, and what a global risk can do to the global economy. According to Ian Simm of Impax Asset Management, “As investors rebuild their portfolios and assess the damage to industries and markets [from the pandemic], many are also taking a more serious look at the other looming global systemic risk: the climate crisis.”

The Take Away

While certainly not everyone in the banking or investor world is screening their investments for things like ESG, climate risk, or CSR practices, a lot are and the number is growing. It is not unreasonable to think that Jill, an investor looking to buy your business, or invest in you so you can grow, will also be asking similar questions that John and Jennifer were asking. In fact, Jill is asking those questions precisely because John and Jennifer are asking them, and because it has become clear that there are actual risks now due to environmental and social factors that could impact a company financially. You may not know today which future investor cares, but by ignoring ESG / CSR now, you could be limiting your financial options.

Your Insurers

You have addressed the concerns of your investors, consumers, and employees. But there is one more person who also is looking at you through a changing lens: your insurer. The following notes from a Deloitte article on the topic say it all:

“ (1) A majority of US state insurance regulators expect all types of insurance companies’ climate change risks to increase over the medium to long term — including physical risks, liability risks, and transition risks.

(2) More than half of the regulators surveyed also indicated that climate change was likely to have a high impact or an extremely high impact on coverage availability and underwriting assumptions.”

In an article discussing how the insurance industry is realizing it needs to adapt to climate change, KPMG notes “It is not inconceivable that some insurers could suffer a triple loss: a large increase in director and officer liability insurance policy claims arising from failure to mitigate, adapt or disclose climate risks; a drop in asset value if they also invest in these companies; and litigation from policyholders who believe their insurers failed to fulfil their fiduciary duty to construct climate-resilient asset portfolios.”

Aberdeen Standard Investments notes “The numbers are huge, and the impact is potentially pervasive — financially, across both the asset and liability sides of the insurance balance sheet, and operationally and culturally too.”

If the insurance industry is currently having these discussions, then it is only a matter of time before those of us on the side of trying to get insurance feel it. Indeed, there is evidence this is starting to happen in some coastal areas. In Florida, if Tim is looking for a place to set up his new office and distribution center today, he may want to look more closely at the flood maps and cost of insurance. The Sun Sentinel notes a move to risk based flood assessments will “likely jack up the cost of flood insurance to as much as wind storm insurance ‘or more’ in the next 5 to 10 years.” With the recent increase in catastrophic wild fires in the Western U.S. and no signs of that diminishing, it can only be assumed that insurers are evaluating their risks in these areas as well.

The Take Away

Insurance for many businesses is a huge expenditure. Increasingly, the industry is going to be evaluating a company’s exposure to different climate and environmental risks. Initially, the focus has been on coastal areas and flooding but recent extreme weather events in many different areas, such as inland flooding from increased frequency and strength of hurricanes traveling inland in the Southeast, to wildfires from Colorado to California in the West, and droughts in other areas suggest that the early predictions of climate change are holding true, namely that there are no isolated areas of impact. Insurers are looking at all aspects of a company’s business, and they too are seeing the increased attention from consumers and investors.

In short, it would be a good idea to sit down and look at your insurance risk, and have a frank conversation with your carrier about what the trends are for you in your industry, in your location, and what you can be doing to get ahead before you are caught off guard. If industry adviser’s such as Milliman are saying that “insurers invested in firms with poor ESG or climate-related publicity could see a [negative] impact on their portfolio values,” you can rest assured the industry is changing already.

Conclusion

As you continue to do basic business management practices like evaluate your market and your competition, or projecting your financials, it is likely time to add one more topic to your strategic planning. What are you doing to best position yourself for this changing ESG / CSR landscape? Are you speaking to the evolving customers and potential employees? Will you not only be prepared to answer the questions when they come, but have the certifications, data, and documentation to back up your claims? Just as we have seen with the COVID pandemic, those businesses that are proactive and look for opportunity will thrive, while those that remain in a reactive stance will likely find themselves falling behind the curve.