We used to face this question around whether being a purpose-driven company is mutually exclusive with what our stockholders want. It’s not at all…being a purpose-driven organization is deeply aligned with shareholder value creation.
With increased stakeholder pressure for businesses to increase focus on sustainability, U.S. CEOs are staying focused on ESG priorities and fulfilling their purpose. Seventy-six percent of CEOs are looking to lock in the sustainability and climate change gains they have made during the pandemic.
Looking ahead, a majority of CEOs (61%) believe their organization’s principal objective is to embed their purpose into everything they do to create long-term value for all stakeholders. “I used to believe that the objective was to create a successful business by making the correct series of business decisions. But I don’t believe that anymore,” says Phil Green, Chairman and CEO of Cullen/Frost Bankers. “I believe that the objective is to create a successful institution. And you get there by making the correct series of institutional decisions along the way.”
“It’s important to step back and understand what’s driving this ESG moment,” says Scott Flynn, Vice Chair-Audit, KPMG U.S. “Today, stakeholders trust and, therefore, expect businesses to help solve our biggest societal challenges. This dynamic manifests itself in many ways. Fundamentally though, employees, customers, investors and, most recently, regulators are raising expectations on companies to deliver long-term ESG commitments.”
Successfully embedding purpose by implementing ESG programs requires the creation of an enterprise-wide strategy, explains Rob Fisher, KPMG IMPACT and ESG National Leader, KPMG U.S. “You have to understand and anticipate stakeholder expectations by identifying ESG issues to focus on, assessing the gaps, risks and opportunities. That effort typically includes a materiality assessment and benchmarking ESG goals against industry peers. On that basis, you can create an intentional strategy. Then, you have to operationalize that strategy, set KPIs, measure progress, and tell your ESG story through reporting to your stakeholders,” he says.
Jeffrey Brown, CEO of Ally Financial, starts with the customer when devising the company’s ESG strategy to benefit all stakeholders. “My philosophy always starts with caring for, and making bold actions around, the customer. That helps take care of the operations, which takes care of the financials,” he says. “And that really allows you to serve every constituent from your communities to your employees to your customers to your shareholders.”
With investors being the stakeholder group exerting the most pressure for inclusion of ESG in growth strategies (46%), Fisher notes that they demand that organizations invest not only with purpose but also to see enhanced returns. The survey reveals that currently nearly two times more CEOs (37%) said their companies’ ESG programs improve financial performance than those that said they reduce it (20%). Forty-four percent are neutral.
“We used to face this question around whether being a purpose-driven company is mutually exclusive with what our stockholders want,” says Brown. “It’s not at all. Ally Financial’s 170% increase in stock price from 2017 proves that being a purpose-driven organization is deeply aligned with shareholder value creation.”
Over the next three years, U.S. CEOs see purpose as having the biggest impact on driving financial performance (89%), building customer relationships along with brand reputation (both 87%). With inorganic growth and M&A being the top growth strategies, purpose is also shaping capital allocation, partnerships, alliances and M&A strategy (86%).
Enterprise Holdings is an example of a company willing to combine capital allocation with environmental causes. “As one of the world’s largest mobility providers, we can play a meaningful role in the investment and adoption of emerging technologies like autonomous, connected and electric vehicles (EV),” says Taylor. “For example, our expansive network enables us to build consumer awareness and understanding of EVs and their supporting technology. We recently conducted a significant study into EV adoption and the implications for vehicle rental, where we analyzed more than 30 million rental transactions to define a long-term strategic direction for bringing more EV technology to market in vehicle rental.”
While they yield multiple business benefits, ESG initiatives do not have to be costly to implement. Ameresco helps its clients minimize their impact on the environment. “We help our clients reduce their carbon footprint, often yielding 30% savings via ‘budget neutral’ energy-efficiency projects that can be financed through a third party and get paid out of the savings,” says Sakellaris.
While CEOs are undertaking energy-saving and carbon-neutral initiatives, they also see a big role for the government in alleviating the progression and impacts of climate change. Seventy-four percent believe government stimulus is needed to turbocharge climate investments being made by the business community, and 78% say that leaders at the United Nations Climate Change Conference (COP26) must inject the necessary urgency in the climate change agenda.
Digital transformation serves as an accelerator of ESG initiatives. Seventy-four percent of U.S. CEOs said their organization’s digital and ESG strategic investments are inextricably linked.
“The investments we’re making are not designed only around digitalization and automation within our manufacturing plants; they’re also intended to create a much more environmentally friendly production process,” says Lear’s Scott.
KPMG’s Fisher sees parallels between digital transformation and ESG. “I would like to think of ESG for the 2020s and beyond as what digital transformation has been for the 2010s—a critical way for organizations to compete better and disrupt how they do it,” he says.
With ESG initiatives embedded into the business strategy come heightened expectations about reporting and transparency. Fifty-two percent of U.S. CEOs said they’re seeing significant demand for increased reporting and transparency on ESG issues today from stakeholders. Fifty-five percent expect to rely increasingly on external assurance of their ESG data to meet stakeholder/investor expectations around consistent and robust sustainability reporting.
“We believe embedding ESG within a company’s strategy and purpose makes business better. Effective engagement creates value, mitigates risk, builds stakeholder trust and delivers competitive advantage,” says KPMG’s Flynn. “Reporting is how business proves it is making an impact on society and achieving its ESG goals.”
RE/MAX recognizes the importance of an independent, third-party assessment of its ESG strategy and progress surrounding it. “We have been getting an unbiased external perspective about our ESG efforts, which I encourage all business leaders to do,” says Contos. “It was really exciting to see the great results and also get the perspective on how best to continue.”
“Each company’s ESG journey is unique, but there are steps all leaders can take to prove their ESG commitments are both effective and meaningful,” says Flynn. “Every company has an ‘ESG story,’ and if you’re not telling it, the ESG raters and indexes are going to tell it for you. It may not always be perfect, but investors and other stakeholders want to know where the company is on its ESG journey.”