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ESSENTIALS FOR LEADERS AND THOSE THEY LEAD
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Edited by Rama Ramaswami Senior Editor, New York
The concept of doing well by doing good dates back to the origins of modern industrialized companies. For example, in 18th-century England, pottery manufacturer Josiah Wedgwood provided housing, training, and a rudimentary form of health insurance for his workers, even building an early version of a “company town.” In the past few decades, the question of whether businesses should be socially responsible as well as profitable has been addressed in various ways, from the corporate social responsibility notions of the 1990s to the environmental, social, and governance (ESG) objectives that are critical to gauging an organization’s performance today. But given mounting pressures to deliver on both financial and nonfinancial goals, it can be difficult for leaders to figure out just how to translate ESG directives into practical actions. Frequently, it’s about knowing what to focus on—and what to leave out.
AN IDEA
The key to making good ESG decisions lies in first understanding where your company is on the ESG maturity curve. Most major companies fall somewhere on the spectrum between minimum practices—basic risk mitigation and reporting—and advanced next-level measures that fully embed ESG into strategy and operations. The next step is to map your organization’s business model against each ESG dimension. As McKinsey senior partners Lucy Pérez, Hamid Samandari, and their colleagues suggest, define your company’s “superpowers”: What are its unique capabilities to have a differential impact? This will in turn determine which of the three ESG dimensions you need to prioritize and how you can identify initiatives that matter most to the company’s business model. For example, a pharmaceutical manufacturer may focus on social metrics such as accessibility and affordability, whereas a renewables company may prioritize environmental metrics such as reductions in greenhouse-gas emissions.
A BIG NUMBER
15%
That’s the percentage of investors that can successfully integrate ESG reporting into their investment decisions—despite the huge volumes of information they receive. “Most large companies report extensively and ambitiously around ESG in order to inform their stakeholders,” says McKinsey partner Sara Bernow in this podcast. “However, the stakeholders have a difficult time making sense of all that reported data.” A lack of standardized frameworks and metrics limits the clarity and reliability of ESG assessments. Leaders can mitigate this by combining quantitative data with qualitative insights, Bernow says: “Since few companies have reported extensive ESG metrics for a long time, it’s best to use qualitative data to get a view of the trajectory.”
A QUOTE
That’s McKinsey partner Robin Nuttall on the importance of understanding the relationship between an organization’s purpose and its ESG initiatives. Purpose—the positive impact that the organization hopes to have on the world—is “underpinned by purposeful activity, which often takes the form of environment, social, and governance factors,” says Nuttall in this McKinsey podcast. Aligning ESG efforts to the values that the company stands for is more likely to produce better business outcomes; otherwise, “the pitfall is that you may state a purpose but have no plan to deliver on it, or you may have a plethora of ESG programs, but nothing ties them together,” Nuttall says.
A SPOTLIGHT INTERVIEW
‘The days of separating shareholder interests from broader social interests are gone,’ says Karen Wood, chair of the board of South32, a diversified-resources company headquartered in Australia. In this discussion with McKinsey senior partner Michael Ellis, Wood recounts how COVID-19 led South32 to highlight the social element of ESG. Responding to the challenges of the pandemic, the company strengthened its focus on encouraging community education, leadership, and participation in the local economy, as well as helping with mental-health issues and fostering natural-resource resilience. “By 2050, we will all be well beyond this debate about shareholder interest versus broader stakeholder interest,” says Wood. “That debate will be well and truly settled—these are shared interests that can both be met simultaneously.”
‘GREENWASHING’
When companies make exaggerated claims about the sustainability of their products or business operations, they’re often accused of greenwashing—a practice that is coming under increasing regulatory scrutiny. Like any movement, ESG has its share of skeptics. Its detractors claim that it is a distraction, too difficult to implement, and not measurable; some critics even advocate replacing the label “ESG,” since it can spark intense controversy in both corporate and political circles. For leaders who wish to better understand the debate, getting to know the players and participating in ESG initiatives are good places to start.Lead responsibly.
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