Social-Impact Efforts That Create Real Value

They must be woven into your strategy and differentiate your company.

by

George Serafeim

by

George Serafeim

From the Magazine (September–October 2020) · Long read

Marlies Plank Marlies Plank

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Social-Impact Efforts That Create Real Value

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The Board’s Role in Sustainability

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The Challenge of Rating ESG Performance

Summary.

Companies don’t win over investors just by issuing sustainability reports and engaging in other standard ESG practices. What they need to do, says Harvard Business School’s George Serafeim, is integrate ESG efforts into strategy and operations. He makes five recommendations: Identify the material issues in your industry and develop initiatives that set your firm apart from rivals; create accountability mechanisms to ensure the board’s commitment; infuse the whole organization with a sense of purpose and enthusiasm for sustainability and good governance; decentralize ESG activities throughout your operations; and communicate regularly and transparently with investors about ESG matters.

The Board’s Role in Sustainability

To build long-term profitability, boards of directors must pay more attention to ESG concerns—and a compelling corporate purpose should underpin their efforts. That’s the contention of the authors, who offer a research-based framework called SCORE to guide boards’ actions: Simplify—define and communicate your purpose clearly; Connect—link your purpose to strategy and capital allocation decisions; Own—ensure that all employees embrace the firm’s mission and have the means to deliver on it; Reward—tie executive compensation to metrics that include ESG performance; Exemplify—use data and narrative accounts to show stakeholders how you’re achieving your purpose and improving sustainability.

The Challenge of Rating ESG Performance

Over the past decade, more and more institutional investors have taken an interest in companies’ records on environmental sustainability, social responsibility, and governance. In this article the head of ESG research at Sustainalytics, which gathers information on tens of thousands of companies worldwide, explains why this data matters and how his firm arrives at its performance ratings. The process involves identifying the risks a company faces, assessing how well it’s managing them, and engaging in follow-up dialogue to ensure accurate analysis. MacMahon also discusses why certain companies’ ratings have improved or worsened and how to put your best foot forward.

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Idea in Brief

The Situation

Many CEOs feel as if they’re doing everything that’s asked of them in terms of improving environmental, social, and governance (ESG) practices. Yet their firms aren’t being rewarded by capital markets.

The Insight

Following the crowd on ESG activities is not the answer. To gain a competitive advantage, firms should instead focus on the ESG issues that are financially material for them and pursue those in distinctive ways.

The Actions

Management should take five steps: Adopt strategic ESG practices; create accountability structures for ESG integration; identify a corporate purpose and build a culture around it; make operational changes to ensure that the ESG strategy is successfully executed; and commit to transparency and relationship building with investors.

Until the mid-2010s few investors paid attention to environmental, social, and governance (ESG) data—information about companies’ carbon footprints, labor policies, board makeup, and so forth. Today the data is widely used by investors. Some screen out poor ESG performers, assuming that the factors that cause companies to receive low ESG ratings will result in weak financial results. Some seek out high ESG performers, expecting exemplary ESG behaviors to drive superior financial results, or wishing, for ethical reasons, to invest only in “green funds.” Other investors incorporate ESG data into fundamental analysis. And some use the data as activists, investing and then urging companies to clean up their acts.

A version of this article appeared in the September–October 2020 issue of Harvard Business Review.

Next In

The Board’s Role in Sustainability

A new framework for getting directors behind ESG efforts

GS

George Serafeim is the Charles M. Williams Professor of Business Administration at Harvard Business School, where he leads the Climate and Sustainability Impact AI Lab. Follow him on Twitter @georgeserafeim