How business leaders can turn ESG into a competitive edge—and a calling
As environmental, social, and governance (ESG) topics rise on the corporate agenda, too many companies are mired in old ways of thinking, treating ESG as compliance, altruism, or corporate responsibility. They have hired a chief sustainability officer but haven’t yet mobilized the organization to adopt a sustainability lens. They have equity and inclusion on their score card but haven’t yet built equity and inclusion into their culture and business every day. They publish disclosures but haven’t crafted a distinctive story to share. They use their ESG agenda to guide donations when they could be using ESG to guide their biggest strategic decisions.
These missed opportunities are increasingly a liability. Employees, consumers, and communities are holding companies to account for environmental and social stewardship, and socially responsible investing (SRI) now represents over 36% of global assets under management, projected to total $53 trillion by 2025.
Study after study shows that purpose and ESG are not distractions; they are key to long-term performance. We have found that high-purpose companies are more than twice as likely to rank in the top two quartiles of 10-year total shareholder return performance as their low-purpose peers. And top performers on ESG topics are rewarded with valuation multiples 3% to 19% higher than median performers.
The companies that will lead in this context go beyond a generic, box-checking approach. They pursue what we call Authentic ESG—a commitment to environmental and social impact that is driven by a deep sense of purpose, embodied within the organization, woven into the business, and integral to their brand story. They go beyond a compliance or contribution mindset and instead view ESG as a competitive advantage and ultimately a calling.
Fig. 1: Authentic ESG: Mindset Maturity Scale
Getting to ‘Authentic ESG’
Getting Authentic ESG right takes more than avoiding the pitfalls of greenwashing and empty commitments. It’s about using your purpose to identify impact areas that are meaningful to your company and its stakeholders, then harnessing the full heft of the organization to drive innovative, value-creating changes across the business. Because purpose and ESG are not about what you do with the money you make. They are about how you make your money.
There are clear steps that every company will take as they upgrade their ESG strategy: Develop a dynamic view of material topics for your company, set ambitions and key initiatives across those topics, operationalize the change, and build a rigorous tracking and reporting muscle.
The problem is, it’s possible to do all these steps and end up with an approach that falls flat with the stakeholders you most want to engage. To tap into the transformative power of Authentic ESG, consider four principles and four steps that go beyond the standard to-do list above.
These principles capture four essential mindset shifts that leaders must embrace to make a truly transformative move toward Authentic ESG.
- It’s the CEO’s job.
One of the challenges companies face is that ESG topics are often sidelined as philanthropy or siloed across functions. But your environmental and social agenda cannot sit off to the side; if it is going to drive the business, it has to be in the core of the business. As such, it belongs on the desk of the CEO, supported by the C-suite, championed by the board, and lived, believed, and owned by the full organization.
Leadership on ESG topics is now an expectation of CEOs; when they relegate it to a function or delegate it down, they miss the opportunity to lead, and they hamper the organization’s ability to move boldly. Supported by robust centers of excellence and functional expertise, it is the CEO’s job to drive—with purpose as fuel—a fundamental transformation of the business to create sustainable value.
2. Profitable is scalable.
One of the most critical mindset shifts for leaders is to move away from the idea of ESG as altruism. The mechanics of running a business mean that if you’re losing money on your ESG effort long term, you won’t stick with it. If ESG is a cost center, there will always be pressure to manage it down. But when ESG shifts to be a profit pool, a scalability enabler, an innovation engine—that’s when its impact truly compounds. Because profitable endeavors are scalable endeavors, and scaling environmentally and socially beneficial business is how real, game-changing impact will be made for people and planet.
That does not mean a socially beneficial or sustainably made product has to be as profitable. In fact, entering a lower margin business that is aligned with your environmental and social goals is a sure sign of Authentic ESG in action.
3. If you’re not uncomfortable, you’re not doing it right.
Authentic ESG goes beyond donations and disclosures to re-examine and re-think the value drivers of the business. Reducing the negative impact of existing activity is an important first step, but the real value lies in finding the win-win solutions that provide both economic and environmental or social benefit.
This is a significant shift in the objective function of most corporations, which have been built into finely tuned profit-maximization machines. Putting a “Save the planet!” bumper sticker on that machine won’t change anything. We have to go beyond surface-level, to get inside and re-engineer the machine. And that is neither easy nor comfortable.
Those with the courage to embrace the discomfort by rethinking their assumptions, tackling the intractable issues, telling their story even when it’s imperfect, and using their purpose as an edit point—those are the companies who will be well-tuned to thrive in the era of shareholder capitalism.
4. It’s about cooperation, not just competition.
For companies that have built a strong ESG strategy, a fourth principle kicks in, calling them to go beyond competitive advantage to cooperative progress.
Pursuing ESG is in a company’s competitive self-interest, as capital and talent increasingly flow from ESG laggards to ESG leaders and scarce sustainable sources get locked up. But visionary leaders understand that the crises we face are collective; they see both the imperative and the opportunity for cooperation and consider how they can move the full industry ecosystem by convening as well as competing.
Industry coalitions allow competitors to band together to change complex supply chains. They share the risk of investment in new solutions. And they can team up to advance standards that move the world forward while maintaining a fair playing field for all participants.
When you’re ready to commit, commercialize, get uncomfortable, and cooperate, there are four steps that will help you chart a path toward Authentic ESG. For a fuller discussion of these four steps see the article “Authentic ESG: From Compliance to Calling.”
- Start with purpose. Purpose is your “why,” your reason for being. A clear and compelling purpose not only helps you hone in on an ESG agenda that is credible and authentic, it provides the inspiration and alignment needed to transform your organization through an ESG lens.
- Take a stand. A robust ESG agenda will cover a range of topics across environment, social, and governance issues, but within that fulsome agenda there is merit in taking a spiky approach. What is the one thing that you want to be known for, that you want to move the needle on in an industry-shaping and society-shifting kind of way?
- Embody the change. Create congruence between the commitments you’re making to the world and the decisions being made in your four walls, by taking a thoughtful approach to educating, inspiring, and mobilizing your organization around your ESG transformation.
- Tell your story. In addition to a bold and clear-eyed ESG strategy, you need a compelling and distinctive ESG story—a strategic narrative from which all ESG-related communications flow, a thorough understanding of which messages matter most to which stakeholders, and resonant, breakthrough creative work. If you fail to tell your story well, you miss the opportunity to attract capital, attract talent, attract customers, build trust with partners and regulators, and inspire advocacy.
We’re in a moment of collective awakening about the role of corporations in society; the expectations of employees, customers, and investors are changing rapidly as the urgency of our collective challenges mounts. So while others are gingerly dipping a toe in the waters of stakeholder capitalism, now is the time to dive in. To go beyond generic ESG—to transformative, industry-shaping, Authentic ESG.
Maggie Schear is managing director at BCG BrightHouse. Rich Hutchinson is senior partner and managing director at BCG. Marjolein Cuellar is senior partner and managing director at BCG.
Never miss a story: Follow your favorite topics and authors to get a personalized email with the journalism that matters most to you.