The Opportunities of ESG

Last month I participated in the latest meeting of the Northwest Ethics Network (NWEN) where we discussed the topic “Enhancing the Reliability of ESG Reporting.” Public corporations and their stakeholders are increasingly interested in companies’ environmental, social, and governance policies. ESG reporting now influences many investors who prefer ESG-related information that is material and relevant.

Meanwhile, other stakeholders, such as NGOs, industry regulators, and sector watchdogs, prefer ESG information that is both transparent and indicative of progress on social and environmental matters. 2020’s upheavals have only elevated this attention.  Many have called for corporate disclosures regarding investment in employees and communities, climate-related risks, as well as Covid-19’s impacts on operations, liquidity, capital resources, and even the organization’s very existence as a going concern. As a result, ESG is inevitably linked to the broader issues of racial equity, climate change, and social justice.

This broader demand for ESG-related information comes with a rise in intermediaries including ESG data providers and a variety of organizations that provide ESG standards. However, in such a current state of largely voluntary ESG reporting in the United States, even the SEC cautions users against aggregated ESG ratings because of issues around data measurement, survey gaps, peer group opacity, and information overload. How, then, are corporations “taking control of their ESG narrative,” and providing investors as well as other stakeholders ESG-related information that is concise, comprehensive, comparable, and credible?

To better understand this challenge, the NWEN also invited , Costco’s Vice President of Global Sustainability and Compliance, to share her views on stakeholder engagement as one part of Costco’s broader ESG agenda to be profitable while doing the right thing. Costco’s commitment to sustainability is structural and not merely window dressing. Flies reports directly to the CEO to help set the tone-at-the-top and claims over 243,000 employees worldwide as partners in Costco’s sustainability team to bring about meaningful change.

Facilitating such a corporate culture change is not simple, especially now that current events call for us to expand ESG to include “D,” as in diversity, equity, and inclusion. There are many social and environmental challenges to address, with no foolproof solutions. Various stakeholders move at different speeds and operate in separate lanes, yet there is an expectation that ESG practices need to be quantified and integrated into corporate reporting. The UN’s Sustainable Development Goals have had a positive impact on Costco’s activities in local communities; other social impacts, however, are notoriously challenging to measure. Flies emphasizes that numbers cannot fully reflect the impact that ESG can have on people and the planet. Audits alone will not cut it and actions always speak louder than words.

Costco models this approach by meeting stakeholder where they are, partnering with non-governmental organizations around the world, addressing specific issues using targeted initiatives, and embarking on a holistic climate action plan, even in the midst of everything 2020 has given us. Viewing legal compliance as merely a floor, Flies maintains that transformational, ethically responsible action takes courage.

It also serves as an inspiration for the work of the next generation of business leaders., As just one example, consider Tyler Yeh, a recent Seattle University graduate in finance working in compliance, who participated in the NWEN meeting. In a note to me, he expressed his impressions of Flies’ work:

I was impressed by her ability to frame this pandemic in way that sparked honest reflection in all of us for the massive weight we’re holding...Sure, a pandemic on its own is tough, but add ongoing racial injustice, a recession resulting in mass unemployment, a broken democracy, and climate change…And while this added stress on all of us may not relate directly to ESG, the situation that it creates could lead to big opportunities for responsible business. As Flies pointed out, “it’s an opportunity to rise from the ashes” since “everyone is on an even playing field.” But that observation is just a starting point. The real challenge? Getting that collective “buy-in” from all stakeholders, from super advocates for sustainability to people not looking for drastic changes within their company…

How do we communicate in a way that speaks to all the different interests around ESG? Some may want a “number” that allows us to measure our ESG performance, but metrics are themselves values-based. Ultimately, as Flies notes, the world is people and responsible business is about the relationships that are built, the mutual trust that is created, and the respect that is earned between our companies and its stakeholders.

ESG will remain an important concept, and not just for its impact on how we assess corporate performance. ESG signals the courage to do business in a way that provides enduring impact without easy measurement.

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