Vivek Ramaswamy has made an anti-ESG crusade the central theme of his long-shot bid for the 2024 Republican presidential nomination, but long before the former hedge fund investor jumped into the race, ESG had become politically problematic. But that doesn’t make it bad business. A group of authors from FTI Consulting talk about how corporate leaders can navigate risk around ESG efforts.
Christine DiBartolo, Cheyenne Hopkins, Darius Johnson, Jess Roston, Raleigh Miller and Will O’Brien co-authored this article.
While the debate continues to grow over how ESG should factor into business strategies, regulation and investment decisions, companies managing this charged environment should take comfort in knowing that the key to successfully navigating this rapidly evolving landscape boils down to a few core principles.
In the United States, the concept of ESG — environmental, social and governance factors companies and investors use to evaluate business risk and opportunity — has become a political lightning rod. Building steam over the past year, the movement toward ESG polarization has been punctuated by recent events, including legal feuds between prominent brands and major political figures. The national attention such conflicts elicit illustrates how much and how quickly the discourse around ESG has changed and the potential impact — commercial and reputational — these issues can have on a company and its leadership.
The business community’s stance on ESG has shifted, too. During a recent gathering of the Fortune Impact Initiative, few executives defended the continued use of ESG as a term, but most said they planned to double down on ESG issues.
As companies and business leaders seek guidance on emerging ESG issues taking hold in the public discourse and how to navigate associated risk, we identified several key principles to guide companies in authentically engaging around these critical issues. Our top guiding principles include:
1. Remain true to corporate purpose.
Irrespective of the issue, companies that remain rooted in their purpose and allow decisions to be guided by a clearly articulated mission and vision prove to be far more resilient and trusted than companies that routinely change positions on issues or that rush into debates that can draw scrutiny from stakeholders. Companies have the opportunity to demonstrate authenticity as they engage — or refrain from engaging — around issues that align with their value-creation purpose.
2. Take an approach focused on value creation and rooted in data.
Companies with mature ESG programs that are thoughtfully linked to a corporate business strategy have ample data at their disposal. Leveraging this information to demonstrate and routinely communicate the quantifiable financial benefits of an ESG strategy is a must. Put another way, companies should shift the focus of their ESG engagement from anything resembling political debate to a discussion around how ESG creates sustainable value for the business and its stakeholders.
3. Understand where your stakeholders are and what they expect from the company and its leaders.
Employees: Consider an inside-out approach that focuses on addressing employees first. Companies need to understand where their employees are coming from to anticipate their views on ESG issues. While our “CEO Leadership Redefined” research shows that a significant majority of employees express a positive sentiment toward ESG when it is defined for them, employees are far from being a monolith, and the actions and positions they expect from their leaders is highly dependent upon the culture of the company, employee demographics and other factors. Independent of employee perspectives on external ESG factors, they are giving increasing weight to workplace culture dynamics like inclusion and belonging as they decide where they want to work and whether or not to stay.
Customers and communities: ESG programs should reinforce and accelerate corporate social responsibility (CSR) and external community engagement efforts. For example, a 2019 survey found that 80% of U.S. consumers believe companies should support societal issues related to human rights.
Policy influencers: Our CEO research shows an almost exact 50-50 split in D.C. policy influencers between those who believe ESG is “doing well by doing good” and those who claim ESG is simply “woke.” This suggests that any decision around how to approach ESG will be met both with approval and opposition by policy influencers.
Investors: Investors, meanwhile, continue to consistently see the value in ESG. Our CEO research shows that seven in 10 institutional investors see ESG as “an important risk management tool.”
4. Thoughtfully consider how to respond and engage on critical issues.
Identify first whether further engagement will support the long-term value and reputation of the organization and if the issue is central enough to your business and values that you have a right to engage. For example, our data shows that 68% of employees, 79% of investors and 95% of policy influencers agree CEOs should engage in politics only if the issue directly affects the company’s operations
The hot debate playing out around the viability of ESG has companies rightfully paying attention to what’s around the corner and how they will be required to engage. While the trajectory of ESG’s ultimate role within business remains uncertain, companies that stay authentic and consistent, focus on value, remain attuned to the expectations of their stakeholders and that engage thoughtfully will be best positioned for success as demands around ESG engagement continue to shift with the rapidly evolving landscape.