By Paul “Max” Le Pera and Jessica McNaughton
We previously defined and detailed a much broader framework of what sustainability should mean to a business and how all the tendrils we outlined could work together in a formidable synergy to increase the value and sustainability of a company. We’ve elucidated this paradigm, so business owners and stakeholders can create equity through stewardship, align personal and core values with their business operation, mitigate risks, increase accountability, and ultimately anneal their business from within. To expand upon this, we venture to assimilate our framework for sustainability with the profound momentum surrounding trending criteria used to evaluate investments by capital markets.
Entity valuation criteria are rapidly transcending what is portrayed by a company’s P&L. Despite a rigid set of accounting standards used to report a business’s financial position, there are a plethora of nonfinancial conditions neither reflected nor reported by a company that can affect the long-term viability of a company. These nonfinancial conditions are coming under increased scrutiny.
Today, there are a growing number of investors who are actively seeking alignment with their core values to those of an investment target. Core values are more expressed by leadership, actions, systems, controls and culture versus any quantitative figure. It is no wonder, then, that the rapidly emerging investing styles of Environment, Social and Governance (ESG), Socially Responsible Investing (SRI) and Impact Investing (II) have garnered much of the limelight in capital markets now.
Arguably, the genesis of this more progressive consciousness began better than two decades ago when the terms Safety, Health and Environment (SHE) and Corporate Social Responsibility (CSR) became commonplace among larger firms looking to differentiate themselves by demonstrating a commitment to people and the planet. CSR, although quantifiable in number and levels of achievement, typically included qualitative measures without a concrete set of metrics to gauge efficacy. During the first decade, interpretations of what CSR meant and how it was applied and accounted for significantly varied, yet the intentions were valid. Practices like volunteering, broad efforts to minimize carbon emissions, use of renewable energy, and a focus on profit, people, planet — or triple bottom line — were included to varying degrees. The movement gained such momentum that even International Standards Organization (ISO) scripted and issued ISO 26000 entitled “Social Responsibility.” Essentially, ISO 26000 clarifies social responsibility and helps organizations translate CSR principles into practical actions.
CSR and SHE have evolved to focus on including the qualitative measures of ESG, SRI and II. ESG evaluates a company’s position on environmental stewardship, social stewardship, corporate culture and surrounding communities, and governance, including leadership, human resources and ethical practices. SRI deals primarily with choosing investments centered on specific ethical standards and procedures. II is used to support an organization in developing programs and augmenting projects that will benefit society with targeted goals.
Currently, ESG seems to be the new buzzword on Wall Street and deservedly so as the funds surrounding interest are profound. There is a need for caution, however, as ESG still has a rather broad and unstandardized definition, widely being personalized, which makes the outcomes inconsistent or washed to meet individual expectations. As we all saw in the green and organic movements, fundamentally sound ideas were exploited to the distant margins of applicability to gain the Halo of Affection and equity gained by marketing and association.
As we move to assimilate ESG with our holistic sustainability framework, we focus on three areas of quantifiable criteria:
- Environmental criteria include water and land conservation, climate change, energy and renewables, biodiversity, waste management and carbon emissions.
- Social criteria include human rights and protections, diversity and inclusion, wage equity, labor standards (health and safety), and more corporate-focused metrics like customer satisfaction, employee engagement and corporate culture.
- Governance criteria focus on how the business runs at the executive level and include audits, board composition, accountability, executive compensation, lobbying, political contributions, bribery, corruption and ethics.
What does this all mean for the many constituents of ISFA and our industry? Simple. As companies intentionally decide to refocus their organization toward holistic sustainability, they can use ESG as a current set of guidelines to help steer their efforts. If your company has been apathetic toward embracing sustainability, given the valuation criteria being used by investors today, there should be significant motivation to consider a change of course.
We asked ISFA member Matthew Bodoff, business development and marketing manager for INEOS Composites, about how his company views social responsibility and if they consider ESG as part of their growth efforts these days. “At INEOS, safety for our people, communities and environment is priority #1,” said Matthew. “Collectively and individually, we are committed to protecting and maintaining the quality of the environment and to ensuring the health and safety of our employees, of all those who work with us, and of the communities in which we operate. To this end, we work continuously to improve our SHE performance, and we never compromise our SHE standards for any reason — profit, commercial, production or other. In fact, health and safety are so important to INEOS that bonuses are tied to safety performance.
“We believe that our ability to achieve net-zero emissions by 2050 while remaining profitable are not mutually exclusive items,” he continued. “It is our commitment to develop and safely manufacture the products needed to address the evolving challenges of climate change, public health, resource scarcity, urbanization and waste that has allowed us to become one of the largest chemical companies in the world.”
The fact of the matter is, ESG is a focus of investors today. Sustainability is not just a feel-good movement; it is a valuation tool. It is paramount to understand that the decision to refocus on holistic sustainability should not be motivated by profit. The ROI for aligning with ESG criteria will typically not appear on next quarter’s P&L. However, the ROI will reveal itself in the mitigation of business risks and optimization of the actual and perceived value of your business. It can also return profit and equity by eliminating liabilities. When you decide to exit your business, your financial statements would be reinforced with the nonfinancial equity of ESG criteria, and you can certainly command a premium for it.
Holistic sustainability and ESG matter, and ISFA is committed to educating and improving the overall health of the industry and, thereby, its members. As part of our continuing efforts, we encourage an independent and voluntary choice to champion holistic sustainability. However you choose to define and implement your stewardship, we’ll be there with you every step of the way.
Paul “Max” Le Pera is the president and founder of Proprietary Ventures, LLC, a boutique-style global firm devoted to researching, discovering and deploying disruptive and sustainably oriented proprietary products and technologies. He serves on the ISFA board of directors as vice president of standards. He can be reached at email@example.com
Jessica McNaughton serves as president at CaraGreen, a provider of sustainable building materials, including many alternative surfacing materials. She has 20 years’ experience in sales, marketing, business development and strategy. Previously the director of sales and marketing at CaraGreen, Jessica has maintained her status as a LEED Accredited Professional since 2009 and she hosts a podcast, Build Green Live Green. She can be reached at firstname.lastname@example.org.