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RAPPORT // Visionary Leaders Balance ESG Responsibility and Financial Value

By
Deb Westphal
July 25, 2019

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“One thing, however, is certain: the world needs your leadership. As divisions continue to deepen, companies must demonstrate their commitment to the countries, regions, and communities where they operate, particularly on issues central to the world’s future prosperity.”

– Larry Fink, CEO of Blackrock

If you haven’t been paying attention, you may have missed the important shift happening across the global investment community. The drumbeat for corporate executives to actively engage environmental, social and governance (ESG) issues has gotten louder and no longer can be ignored. Socially conscious investors are raising the volume on their call to action for companies to integrate robust ESG strategies with existing company operations. The expectation is that it is possible for corporations to increase financial value while being accountable for helping to solve issues facing humanity.

Long-term investors are prioritizing work with future-focused leaders who understand that being responsible to our emerging generations and the world they will inherit goes hand-in-hand with increased financial performance.

In their 2019 Harvard Business Review article, The Investor Revolution, Robert Eccles and Svetlana Klimenko share data that illuminates how fast capital markets are shifting. For example, the UN-backed Principles for Responsible Investment launched in 2006 with 63 investment companies committed to incorporating ESG issues into their investment decisions. These original signatories totaled $6.5 trillion in assets. Only 12 years later, the signatories have grown to 1,715 -- representing $81.7 trillion in assets. Adding to that picture of progress, a 2018 survey by global investment analysis firm FTSE Russell stated that more than half of global asset owners were implementing or evaluating ESG considerations in their investment strategy.

One such leader is BlackRock CEO, Larry Fink. BlackRock is the world’s largest asset management company, overseeing $6.3 trillion worth of investments. Every year since 2012, Mr. Fink has sent out an annual letter to the CEOs of BlackRock portfolio companies. In his most recent letters, he has steadily and strongly encouraged corporate world leaders to work together to help the global society. The letters have become a rallying cry for responsible long-term business strategies, daring leaders to expand their focus beyond purely financial gain.

“Unnerved by fundamental economic changes and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues. These issues range from protecting the environment to retirement to gender and racial inequality, among others"          

– Larry Fink, CEO of Blackrock

Fink threw down the gauntlet and the larger investment community has joined in, maturing its broader position on ESG. Nonetheless, many company executives continue to lag in their awareness of the influence this community has on their future. Only a few future-focused leaders have proactively embraced the need to get on board.

For those who actively dismiss ESG issues or who do not fully understand the shift, the consequences may be very real and dire. The Investor Revolution highlighted a recent survey by Bank of America Merrill Lynch in which U.S. executives underestimated the percentage of their company’s shares held by firms employing sustainable investing strategies. Their average estimate was 5%. The actual percentage is closer to 25%.

The growing investment community emphasis on ESG is demanding that companies step up to the challenge of bringing focus and responsibility as stewards of mother earth. How they deal with such things as greenhouse gas emissions, energy, water management, and waste generation is being elevated to priority status. In addition, how companies manage complex relationships within a changing society, across a dynamic network of employees, suppliers, customers, and the communities where they operate means stepping into delicate social issues including human rights, standards, customer privacy, and workplace diversity and inclusion.

We’re only at the start of this vital, sweeping movement and there’s much to be done. As adoption and engagement continue to increase, more focus needs to be put on figuring out how to integrate the shift into the corporate operating system. What this means first and foremost is that to be successful over the long term, leaders will need to embrace new mental models for how their companies function and how they (and we) define a successful business.

 

Making Room for New Thinking

Embracing new mental models for future success begins with leaders identifying and addressing the obsoledge (obsolete knowledge) that exists within their own heads and across the organizations they lead. Obsoledge includes outdated core beliefs and organizational biases that can inhibit growth and innovation -- it weighs heavily on an organization.

I have written in past articles about the need for new mental models for addressing the issues facing humanity. New mental models change our beliefs about how things work. They change the way we understand the world and how it operates.  They help us build different blocks of knowledge required for the future, not only for the past. New mental models overcome the entrenchment of long-held knowledge and belief systems about sustainability and social engagement. New mental models bring new ideas, insights, and information to solve critical social and environmental issues.

For those organizations seeking to transform their operations, distinguishing between valuable and toxic obsoledge is a key first step. For instance, many mainstream beliefs about ESG most likely are already obsolete. Two notable examples of such obsolege are the belief that the pursuit of a sustainability agenda runs counter to delivering shareholder value or the sense that ESG is just another campaign to address with corporate responsibility.

How are you considering the ideas, insights, and information held by your people? Are they thinking about ESG efforts as part of a new currency for the future of the organization? Are those ideas being supported by vigorous global networks that can harness the power of humanity inside and outside the organization? Are you actively seeking new sources of innovations to solve the critical ESG issues that investors and stakeholders are expecting to be addressed?

These are the questions that are moving companies forward into a position that balances ESG responsibility and outcomes with stakeholder trust and investor support. Once your organization opens up to challenging the obsolege that is holding you back from clarifying your impact in the ESG effort, you will be poised to create new mental models and corresponding behaviors to actively embrace ESG. 

 

Deb Westphal

Deb Westphal

As Chairman of the Board for Toffler Associates, Deborah brings skills and insights honed over 30 years working with some of the top minds and leaders of governments and Fortune 100 companies. Deborah has an MBA from Webster University and a BS in Electrical Engineering from the University of New Mexico, and has completed extensive continuing education with Harvard Business School and Wharton Business School. She is also a member of the National Academies of Science, Engineering and Medicine.

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