By Stuart R. Levine
Published in Forbes
The election of three activist directors to Exxon’s Board was an eye-opener for many senior managers and C-suite executives. Yet for others it was not surprising. Numerous reports have shown that attention to climate change, environmental sustainability, and social responsibility have been, and are becoming even more, important to customers, employees, and shareholders. There is a heightened level of awareness of these ESG (environmental, social, and governance) issues in the companies that people buy from, work for, and invest in. Importantly, people are willing to put their money where their mouth is when it comes to these critical factors.
ESG is no longer just “nice to have”, it is intelligent business. Exxon is a case in point. Exxon’s largest shareholders, investment firms BlackRock, Vanguard and State Street, plus several California and New York State employee pension funds, joined forces with a small hedge fund, Engine No. 1 to elect the three activist directors. Engine No. 1 maintained that Exxon was not preparing for a decarbonized future, which requires a transition away from business strategies that are primarily predicated on fossil fuels. The investor group felt that Exxon’s resistance to new and different policies to address climate change would reduce profitability near and long term. The market seems to have confirmed the decision of BlackRock and the other investors to shake up Exxon’s board in favor of sustainability. The company’s share price, after years of market underperformance, rose more than 50 percent year to date after Engine No. 1 started its campaign at the end of 2020. Exxon markedly outperformed the S&P (13%) and a comparable competitor Chevron (28%).
For a while now, attitudes have been evolving towards increasing attention to ESG, including sustainability. The COVID-19 pandemic accelerated the pace. A recent report from the IBM Institute for Business Value found that 93% of consumers felt the pandemic affected their views on sustainability and that people are willing to pay more for it. In the US, a Pew Research study found a new high for environmental concern, almost matching the economy as a top policy priority. A 2020 World Economic Forum report states that nearly half of EU and about 75% of Chinese citizens consider climate change a major threat to society. Reports of increasing frequency of destructive environmental events are making people understand the need to conserve the environment for future generations versus near term expediencies like convenience and cost.
ESG involves attention to matters of corporate responsibility beyond environmental stewardship. Ethics, development of human capital, fair labor practices, diversity, equity, and inclusion, conservation of natural resources, volunteerism, philanthropy, executive pay, organizational transparency, and more are important aspects. Additionally, IBM found areas of social responsibility like education, gender equality, ending racism, and promoting opportunity were very important or extremely important to about 75% of respondents.
People want their personal values to align with those of organizations they do business with. Consumers are pushing companies to examine their strategies around sustainability and social responsibility. This is integral to brand identity. IBM’s survey data show that 54% of consumers would pay a premium for brands that are sustainable and environmentally responsible, and that customers want to interact with brands that they know are ethical and socially aware.
People also seek values alignment in the workplace. In an extremely tight market for employees, a focus on sustainability and social responsibility gives companies a leg up. A super-majority of potential employees (68%) were more likely to apply to companies that they view as socially responsible, and nearly half (48%) would accept a lower salary to do so. Values have a positive impact on retention as well. Seventy percent of IBM respondents said that they are inclined to stay with an employer with a good reputation on environmental sustainability, and 75% expect their employers to act on issues of social responsibility when needed.
Companies that prioritize ESG are proving to offer better returns than those not so inclined. Even so, many individual investors are willing to vote with their pocketbook. Many people would trade return for sustainability, just as consumers and employees will trade price and salary for it. The Institute for Sustainability Leadership at Cambridge University reported in 2019 that US investors had a strong preference for sustainability, even if it meant a 2-3% sacrifice in returns.
ESG oriented business strategies are very important and communicating them well to stakeholders is critical. Now the general public is paying more attention to statements companies issue about social responsibility. Although SEC regulation does not currently call for public companies to provide specific ESG information, the topic is under examination among SEC commissioners and committees. There is momentum building for the SEC to follow the lead of the European Union in requiring additional ESG information in filings, beyond what may be covered in the current obligation for disclosure of material risk.
That said, more and more companies are including ESG measures in their publicly available materials. According to the global consulting and audit firm, Protiviti, 90% of S&P500 companies issued some form of ESG related reports in 2020, up from 75% five years earlier. BlackRock and other investment management firms expect even more ESG data from issuers. Customers and employees are examining the ESG information contained in voluntary disclosures to discern alignment with their values. This is particularly important for employers, because when company and employee values are aligned, engagement increases, employees gain a sense of ownership in the company and its progress, and results follow.
Larry Fink, the chairman of the largest global investment firm, BlackRock states it well in his 2021 letter to CEOs: “Over the course of 2020, we have seen how purposeful companies, with better environmental, social, and governance (ESG) profiles, have outperformed their peers.” Moreover, as US President Joe Biden, advises: “Today, sustainability is a competitive advantage. But tomorrow it will be business as usual. Don’t get left behind.”
