The pandemic, accompanying economic fallout and ensuing increase in sustainable practices aren’t just about tackling environmental risks. True sustainability is about infusing resilience into infrastructure… and this is where ESG (Environmental, Social and Governance) conversations come into play.
Heightened social, corporate, governmental and consumer attention is increasingly focused on businesses and their brands. Investors are looking for a strong ESG proposition to protect their interests and long-term company success. Doing good and being profitable aren’t in conflict… rather, they’re symbiotic.
Case in point… This past week, Harvard University announced that it is no longer investing in fossil fuels. In a letter posted on the university’s website, President Lawrence Bacow said that, as of June 2021, the school has no direct investments in fossil fuel exploration or development companies, and will not make those investments in the future, “given the need to decarbonize the economy.”
While this approach toward business is a relatively new development, it’s important to take a moment to trace its origins.
A quick summary of 20th century capitalism
In 1925, President Calvin Coolidge said in a short speech, “The chief business of the American people is business…” The phrase caught on and eventually was shortened to “The business of America… is business,” — a mantra that helped to inform the great economic expansion of US society in the 20th century.
All that mattered, many argued, was the bottom line. And that ethos led the country to levels of economic prosperity never before experienced.
Yet, with that expansion, came a host of social ills — including growing wealth inequity, minority underrepresentation, environmental degradation, human rights abuses and political polarization — that the “bottom line” itself… wasn’t designed to address. When a society derives its fundamental values from maximizing profit, history has shown that instability can be a byproduct.
Even Coolidge knew cashflow wasn’t enough
In that same 1925 speech, Coolidge went on to say, “Americans make no concealment of the fact that we want wealth, but there are many other things we want much more. We want peace and honor, and charity which is so strong an element of all civilization. …So long as wealth is made the means and not the end, we need not greatly fear it.”
Throughout much of the 20th century, Coolidge’s paraphrased utterance was the order of the day. However, ideologies began to shift in the late 1980s — with the introduction of an idea called “social capital” — as a measurement of a company’s economic value.
In essence, social capital is the links, shared values and understandings in society that allow individuals and groups to trust each other and work together.
Enter sustainable development
By the 1990s, ideas of sustainable development had taken firm root, and an author, consultant and entrepreneur named John Elkington coined the term “Triple Bottom Line,” or the three Ps: Profits, People and the Planet (PPP). This concept went beyond the traditional measures of profits, return on investment and shareholder value… to include environmental and social dimensions.
By focusing on comprehensive investment results — that is, considering performance along the interrelated dimensions of profits, people and the planet — triple bottom line reporting can be an important tool to support sustainability goals.
Prior to the 2000s, conventional wisdom held that businesses with public sustainability goals were bad investments… and that ethically-guided investment was a recipe for lower yields. But that would change.
In 1998 two journalists, Robert Levering and Milton Moskowitz, published the Fortune 100 Best Companies to Work For — which initially appeared in Fortune magazine — and later, a book listing the best-practicing companies in the US and how their corporate social responsibility actions contributed to financial performance.
Moskowitz argued that improving corporate governance procedures did not damage financial performance. On the contrary, it maximized productivity, ensured corporate efficiency and led to a better bottom line.
In the early 2000s, the success of Moskowitz’s list and its impact on companies’ ability to recruit high caliber employees — and build a strong brand reputation — began to challenge historical assumptions around the financial impact of corporate ethical behavior.
But concepts like a Triple Bottom Line or a list of 100 great companies to work for… lacked an objective standard of measurement. Investment firms needed specific, measurable data to rate companies. And to guide investment decisions. Thus, ESG was born.
A new standard
Similar to a corporate social credit score, ESG measures elements related to sustainability and the societal impact of a company or business. Intangible assets comprise an increasing percentage of future enterprise value, and these three factors together — Environmental, Social, Governance — have been adopted throughout the US financial industry.
This quote from Janus Henderson Investors sums up the rationale behind ESG…
“At the heart of ESG investing is the simple idea that companies are more likely to succeed and deliver strong returns if they create value for all their stakeholders — employees, customers, suppliers and wider society, including the environment — and not just the company owners. Consequently, ESG analysis considers how companies serve society and how this impacts their current and future performance.”
In fact, a growing body of research shows a correlation between strong ESG values and profitability. McKinsey & Company’s Robin Nuttall notes that “consumers are now demanding high standards of sustainability and quality of employment from businesses. These days, newer recruits and millennials demand purposeful work and if you are an employer that can meet that need, you will attract and retain that talent, and likely higher productivity in the workplace.”
So, from all accounts, ESG points to a better way to do business. By increasing its ESG score, a building product brand can snag better employees. Enjoy a better reputation. Contribute to human and global betterment… and make more money at the same time. That’s a winning proposition for everyone.
ESG in action
A growing number of home and building product brands are aligning with this business approach and issuing sustainability or ESG statements and reports.
Here are highlights from just a few recent building product industry reports:
- Shaw Industries released a 2020 Sustainability Report that highlighted achieving its goal to reduce its greenhouse gas emissions 40 percent by 2030, nine years early. Shaw also provided more than 1 million training hours in 2020, and the company and its associates contributed more than $6.9 million to nonprofit/philanthropic organizations.
- Stanley Black and Decker’s 2020 ESG Report noted that the company seeks to reduce carbon emissions 100% by 2030, against a 2015 baseline, then move to carbon positivity so that the company’s carbon capture will be greater than its carbon emission.
- The Home Depot’s 2020 ESG report stated that it reduced carbon emissions by more than 127,000 metric tons in 2020, a 22% reduction, while at the same time growing the business by nearly 20%.
- Toll Brothers released a 2020 ESG report listing the 923 acres of open land it preserved, the 110 miles of walking and bike trails it built, the 61 parks it constructed and the 40,315 trees it planted.
- Tractor Supply Company released a 2020 ESG Report that outlined goals such as reducing energy use by 34%, decreasing water use by 14.8%, recycling 25,000 tons of cardboard, and providing more than 478,000 hours of talent development and training.
- Trex’s 2020 ESG Report announced that the company upcycled more than 900 million pounds of plastic film and reclaimed wood to create its eco-friendly Trex composite decking and railing products.
Why it matters
These aren’t just “feel good” stories… or outliers. Rather, they’re measurable commitments undertaken by reputable and profitable companies. The evidence demonstrates that committing to an ESG program not only has the power to help improve a brand’s reputation… but can also help it to be more profitable and enduring.
So, what about your company and your brand? Are you working on ESG goals that you want the building product channel to recognize? Or perhaps you’re interested in exploring ways to expand on your mission statement and put plans into action?
Whether it’s undertaking an new sustainability campaign — or integrating your existing practices into an ESG framework — K&A is here to help. Send an email to Steve Kleber at sk@kleberandassociates.com to learn more and get the conversation started.
