When looking at a company’s ESG credentials, there is a clear distinction between two different types of business.
One group of companies has ESG baked into the heart of their business proposition. What they do, and how they make money, is environmentally or socially positive, or they provide tools for more effective governance. For these, the messaging is relatively simple as ESG is a fundamental part of their reason for being. The basic ‘why?’ question gets an immediate tick. These companies are mostly led by highly conscious founders or executives, and their passion and cultural values flow through the business like a clear stream. It is hard to imagine them cutting corners on energy usage, waste, carbon, employee conditions or diversity as that would undermine their value proposition. Governance can be a bit more tricky as it tends to put the brakes on passion and creativity, and this is an area where a bit more thought is needed. Governance done well is a real asset, and gives reassurance to customers and backers that the business is controlled, and risks are seen and managed. Sustainability of the business, not just the planet, comes through this channel.
The other group is a bigger community, that do things that are not of themselves environmentally or socially positive, but are necessary for everyday life or business to continue. This embraces everything from chocolate bars to motor vehicles, airlines and lawyers. Whilst there may be options to improve the credentials of the product or service, the most likely approach is to offset the burden that the product creates. In these cases, the ESG challenge is much more about behaviour and how things are done, than the essential qualities of the product or service.
Take Volvo as an example. They recognise up front that as a mobility provider they are part of the problem. In response, they have set a primary goal to reduce lifetime CO2 per car. This is a holistic response that spans actions across their operations and supply chain to address a vehicle’s associated lifecycle emissions:
- reduce tailpipe emissions – through design and technology to make individual products less damaging than previous versions
- reduce operational emissions – with efforts on production facilities, company vehicles, logistics, business travel, employee commuting, waste and other factors
- reduce supply chain emissions – looking at things like steel, batteries, raw materials, other direct components and indirect procurement of things like computers or office furniture
This works in mature markets where a limited number of large scale players compete on similar grounds for market share. They all act to win the hearts and minds of consumers or be left behind. These actions are typically expensive and will trickle through to product pricing over time, but big companies have the resources to cover these actions in the short term.
There are relatively few business of scale that are in the truck group, driving the sustainability agenda through their products or services. Hargreaves Lansdown reported on the five highest ESG rated companies in the FTSE100. The five included two from big pharma, a tobacco company, a miner and a soft drinks bottler. None would be considered to offer sustainability-positive products, and yet all are respected for doing a very effective job of offsetting their product by changing their behaviours or policies. Changing things in this way is hard and expensive, but necessary. The investment markets appear to recognise and reward their responses.
Implications for small companies
The lesson for emerging companies, without the resources to match the big five above, is to make the most of what they have, and make careful choices on what else they can do. It is all about starting out on the right path. If the product is itself a sustainability contributor (the truck community) then it has a head start and must ensure that the culture reflects this constantly as the business grows.
If not a direct contributor (the trailer community), then small teams working in the right way can set a cultural direction for the future that could define the company by behaviour almost as much as by product. This is easy to add to and expand, so when the business reaches scale, it is in good shape to meet market expectations and can focus on the core business of innovation, competitive leadership and customer engagement, without having to play catchup on ESG.
Either way, emerging companies can be leaders in ESG if they are smart about how they carry that load.
Is your company a truck or a trailer? And how does that affect your business strategy or your approach to ESG? Let me know by getting in touch, or leave a comment below to take part in the conversation.