By Chuck Bean
Environmental, social and corporate governance (ESG) is no longer merely an emerging trend, confined mostly to the investment world and the purview of private equity firms. On the contrary: it is far more likely that your company, product and corporate mission are already coming under the scrutiny of a more discerning public than what would’ve been the case just a decade ago.
What has been commonly referred to as “impact investing” — an evaluation of a potential investment’s impact on issues related to environmental and social causes — has matured and evolved to be more far-reaching and much more inclusive of a wider range of stakeholders.
It is no longer only investors who are “voting with their dollars;” it is also the customers who are choosing whether to “invest” in one product or another based on factors beyond price, value and performance.
That valuation? The good that is done in the world, as a reflection of the goods we choose to buy.
In fact, ESG is a trend that is just building up steam — one that will continue to touch more and more companies, and one that very well may decide tomorrow’s winners and losers, whether they become active players in this new reality or not.
Following the “European Model”
As it has with most ecological trends — electric vehicles, lower emission standards, sustainability regulation, food and waste management, green infrastructure — Europe has led the way. In each case, it wasn’t long before the rest of the world followed, including the United States. We see no reason why that won’t be the case yet again when it comes to matters related to ESG.
In fact, various members of Congress and oversight agencies such as the SEC are already pushing for the U.S. to adopt measures enacted by the European Union. What’s known as Sustainable Finance Disclosures Regulation (SFDR) is established legislation that mandates certain disclosures be submitted and made available to the investing public:
By setting out how financial market participants have to disclose sustainability information, it helps those investors who seek to put their money into companies and projects supporting sustainability objectives to make informed choices.
Not only is similar regulation likely coming to our domestic shores, the very presence of such compliance obligation for companies doing business in Europe exposes nearly every large company transacting internationally and/or selling goods into European markets to existing regulation. There is well-founded speculation that the Biden administration will adopt similar actions as a priority, with most of the energy in ESG focusing on the “E” aspect of this trend — the environmental.
So one primary component to following ESG trends is understanding and complying with the regulation side of the ledger. The other is the economic side. Though the “early adopters” may have been players in private equity, ESG has now proliferated throughout all realms of the investment universe, from large investment banks and mutual funds down to the private investor and individual stockholder. Investment decisions are no longer being made solely on the basis of return, future upside, and financial considerations alone. Increasingly, investors of all stripe want to see a commitment to positive environmental and social outcomes.
But the bottom line just may very well be the bottom line. Being conscious of your company’s or product’s market perception as socially responsible will just make more and more economic sense as this trend evolves and matures. The market will increasingly ask: Is this company doing good in the world? Is the product manufactured, distributed and sold in a socially conscious way, in an environmentally friendly manner, and with a positive impact on society and the greater world around us?
That calculus just may become more important (if it hasn’t already) than cost or even product performance. Understanding the degree to which investors and customers value such considerations — and make decisions accordingly — can be game-changing for companies. The game will either be changed to your advantage…or a competitor’s. Being proactive and predictive is any company’s best path forward to navigating toward a future of its own choosing.
How to Know Your Future as it Relates to ESG
The BP example is an illustrative one. A company with a long, entrenched history in the manufacturing of fossil fuels no doubt saw the writing on the wall when alternative energies began to emerge as attractive substitutes for petroleum and gasoline. As such alternatives evolved to become often favored ESG pursuits for governments, investors and customers, it was clear that evolution would be necessary in order for the company to survive and even thrive.
In 2019, BP announced the appointment of a new CEO to lead a dramatic evolution for the brand, “as the company charts its course through the energy transition.” It is their mission to position BP as an energy company, not just an oil and gas company.
While your own company may not require such a drastic overhaul, what is likely is that the business will be impacted by a trend that shows no signs of going away nor slowing down. In fact, it may now be gaining momentum, necessitating proactive steps today to understand where to steer the ship tomorrow.
These days, it is rare that our company takes on a market research initiative that doesn’t touch on these issues in some way. Virtually every brand study we do is executed at least in part through the prism of impact and the market’s perception relative to the brand’s ESG emphasis and the customer’s stated and implied preferences. Customers have always voted with their dollars — these days, the motivators are more nuanced and increasingly obscured.
Such studies might include:
- How important are elements of ESG to a target customer?
- Is their urgency there?
- Does environmental or social impact weigh more heavily in a buying decision than price, performance or reliability?
Understanding the Voice of Customer with respect to “impact” is critical here. But it must be deeply understood: Respondents may indicate that environmentally conscious manufacturing is of great importance to them, but may not change their buying behaviors in the real world based on that stated preference, to cite just one nuance that needs to be studied and analyzed.
- How are competitors making moves to appeal to ESG considerations and market preferences?
- Is there an opportunity for our company to outperform competitors in this evolving space?
- Or are we potentially being left behind and need to change course?
- Furthermore, can research be conducted to confirm whether a competitor’s ESG claims are factual, or mere greenwashing?
As with any trend in its nascence, there is green field for early adopters to explore and exploit, while reticent or slow-moving competitors remain stuck in stasis.
Pricing and Willingness to Pay
- Are necessary investments in the short term likely to pay off in the long run (as is likely to be the case for BP)?
- Will investments in ESG command a price premium, with customers willing to pay more for goods that are manufactured and sold in environmentally and socially conscious ways?
- Does pursuing sustainability open new markets for our goods that were previously thought unaddressable?
Tesla, to name one obvious example, demonstrated that sustainability could be made “elegant.” While electric vehicle battery production injects greater production cost into the manufacturing of EVs — especially early on — Tesla was able to “lean into” the premium status of an EV, creating a luxury brand that would be aspirational and a preferred status symbol for early adopters. Over time, the brand is able to reinvest profits from early sales to develop more price-moderate and accessible models to gain market share and encourage adoption.
A certain segment of the market was willing to pay more…much more. Understanding those market segments and the motivators that exist within them was key to the success of the company’s early rollouts. There is likely a corollary to be discovered among your various audience segments.
The Time Is Now
You would be forgiven if you were to take a wait-and-see approach to environmental, social and corporate governance when it first emerged as an investment discipline. On its face, it may seem to run counter to the notion of traditional investment strategy — return on investment. In reality, we are finding that this particular trend is here to stay. The returns reach far beyond the obvious dollars-and-cents stock price and sales performance data.
Going forward, such returns may be much more sustainable — in the green sense, of course, but also in terms of longevity, endurance and the long-term health of the company for generations to come.
Chuck Bean is a Martec Partner and serves as Chief Marketing Officer. To get in touch, use the Contact Us form below.