Why ESG Can No Longer Be a PR Exercise

Laurie Hays is managing director of special situations, Heidi DuBois heads the U.S. ESG practice, and Lex Suvanto is global head of financial communications at Edelman. This post is based on their Edelman memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here);  For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

If any word sums up the year 2020 for corporations, it is accountability.

One of the greatest pandemics ever has put all three letters of the ESG acronym under scrutiny: what it means to really be a company with a mindset of stemming climate change, creating a diverse and inclusive workforce that is paid fairly, acting with social purpose, and dealing properly with myriad governance issues, including taking action against executives for bad workplace conduct.

While companies used to get a pass for writing climate, sustainability and diversity reports that promised but didn’t deliver now activists, ratings agencies, and regulators are demanding real action on ESG goals, not just words.

Increasingly, companies will have to pay a price for failed ESG plans. Shareholder activists are using ESG “puffery” to attack boards of directors, claiming they have misled investors and other stakeholders. Employee activists are filing lawsuits and going public in droves to protest unequal pay and promotions, citing company promises. And the incoming Biden Administration has set an agenda that could change the way companies are regulated and the way they do business, with a close eye on ESG.

As Marriott CEO Arne Sorenson recently told the Wall Street Journal, “It is crystal clear to companies that have been around a long time that it is in our selfish and pecuniary interests to be good community citizens. Because it’s good for our brand. It’s good for motivating our people. It’s good for creating economic opportunity, which also enhances our customers and causes them to be that much more loyal to us.

So far, companies are not perceived as living up to the challenge. Edelman’s most recent Trust Barometer Survey of Brands Amidst Crisis polled 8,000 people in six countries in October. The results, as expected, showed fears for health and economic safety at an all- time high. But unlike past surveys, 86 percent are expecting brands to solve both societal and personal problems, as opposed to their governments.

Only 31 percent surveyed said that the brands are living up to their expectations of doing an excellent job in helping the country and its people meet pressing challenges.

This gap is further reflected in Edelman’s Institutional Investor Trust Survey which found that despite expectations, a high percentage of investors (79%) say that during COVID-19 their firms are deprioritizing ESG as an investment criteria, and almost as many say the companies they invest in have deprioritized ESG initiatives.

This is the reality of the last decade of ESG PR:

  • In the U.S. Black employees in 2018 held 3.3% of executive and senior manager roles, according to the Equal Employment Opportunity Commission.
  • Women today lead 167 of the country’s top 3,000 companies; more than double the share a decade ago, but still under 6%, according to the Wall Street Journal.
  • Over the past year, 307 companies in the Russell 3000 Index appointed new CEOs, according to Equilar. Only 26 of those were women—and 17 female CEOs stepped down or were ousted.
  • Hundreds of executives, mostly male, continue to be dismissed for workplace misconduct, and companies like Pinterest continue to pay multimillion settlements to women who sued for gender discrimination.
  • The inequality income gap continues to widen, with the highest-earning families making more than half of all U.S. income in 2018, compared to those in the lower four income quintiles accounting for 56% of all U.S. income in 1968, according to the Pew Research Center.
  • Workers in occupations with lower average earnings were disproportionally displaced by the COVID-19 crisis, while workers in occupations with higher average earnings—especially those in the top 20 percent—were impacted to a lesser extent, according to a study by the St. Louis Federal Reserve Bank.
  • The highest concentration of people infected by COVID-19 are essential workers and their families who work in healthcare, nursing homes, food processing and meatpacking plants and transportation systems. They have the highest rates of Covid-19 infections often because they do not have the proper personal protection equipment and cannot work from home.

There is little doubt that following best practices for an ESG strategy is good for business. By a large majority, investors in Edelman’s Trust Survey say they assign a premium to companies that are delivering.

Here are ten recommendations for making sure your company can credibly communicate its commitment to ESG:

  • Purpose Statement. Develop a crisp, clear corporate purpose statement. Ensure that it is broadly understood across the organization.
  • ESG Strategy. Identify ESG priorities for the business. Construct a roadmap for execution.
  • Accountability. Confirm that the right people are accountable for making progress.
  • Governance. Establish C-suite and Board-level oversight mechanisms.
  • Stakeholders. Build strong, two-way communications channels with investors and other stakeholders.
  • Employees. Embed ESG into the company’s employee value proposition. Give employees a voice in setting the agenda.
  • Partnerships. Consider developing partnerships with non-governmental organizations (NGOs) to inform and advance your ESG goals.
  • Measure ESG performance. The ESG team should establish procedures to determine whether the company’s actions match its public ESG goals to mitigate legal and reputational harm.
  • Communications. Provide a consistent ESG narrative and messaging across all communications channels.
  • Taking a Stand. Identify any ESG issues on which your company can adopt a powerful public position.
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