Private Company Directors

Should Private Companies and Family Businesses Care About ESG?

The pressure on companies to enact ESG (environmental, social and governance) plans has come from all sides: investors, stakeholders, employees and regulåators. Public companies have been asked to identify ESG metrics and goals, report on those goals and hold themselves accountable to new and evolving issues.

Compared with public companies, private companies have escaped the scrutiny and pressure around making ESG commitments. However, this is likely to change. ESG should be important to private companies and family businesses, which should, in turn, establish robust ESG plans, reporting against the right metrics and working to make progress on ESG goals.

Why should private companies commit to ESG at all? More pressingly, why should they begin doing so sooner rather than later?

Attracting and retaining top talent

As we continue to move through the pandemic, companies across the nation and the globe are experiencing a “talent shortage” where they are unable to attract and retain the talent they need to survive and grow. Though much of the current misalignment has to do with wages, employees are also concerned about company policy on ESG and how it relates to an organization’s mission and values.

Millennials and members of Generation Z — who already make up more than one third of the global workforce — care deeply about where they work and place a lot of importance on working for organizations that share their values. According to a Cone Communications survey, 64% of respondents consider company values when taking a job, and many won’t take jobs from companies that don’t promote values aligned with their own. Most respondents (88%) indicated that their job is more fulfilling when they have an opportunity to contribute to social and environmental issues. With today’s tough competition for top talent, a robust ESG strategy is essential for attracting, maintaining and growing a vibrant and talented workforce at any organization.

Customers and local communities

Similarly, consumers are researching the brands and products they use. The conscious consumer of the 21st century considers ethics and sustainability when choosing purchases and services. For example, a 2020 Zeno study found that that 94% of consumers feel it’s important that a company has a stated social purpose that aligns with their values, and if the company does, customers are:

  • 4 times more likely to purchase from the company.
  •  6 times more likely to protect the company in the event of a misstep or public criticism.
  • 4.5 times more likely to champion the company and recommend it to friends and family.
  • 4.1 times more likely to trust the company.

Private businesses can distinguish themselves with consumers and other stakeholder groups by their ESG commitments. These commitments can also help to establish private companies in the local communities where they operate. Many private companies already have robust corporate social responsibility programs in their local communities. Though you might not think sponsoring a local baseball tournament is part of ESG, this should be one strand of many strategic initiatives as your company progresses along an ESG journey.

ESG and financial performance

The mounting evidence that companies with strong and robust ESG programs outperform peers without them cannot be overemphasized. Introducing sustainability and other ESG measures drives better financial performance by enhancing factors such as risk management and innovation. Having a robust ESG plan allows companies to better facilitate top-line growth, reduce costs, minimize regulatory and legal interventions, increase employee productivity and optimize investment and capital expenditures. Embracing ESG not only benefits stakeholders and employees, but also improves company performance.

Private companies should act on ESG now

Private companies have an enviable opportunity when it comes to ESG and the investor community. They are often able to take a much more balanced and long-term approach to ESG compared to what is seen at public companies. The investor community doubtless has a big megaphone when it comes to moving the public market with these issues. This can often dictate which ESG issues companies focus on. Private companies, meanwhile, are in a unique position to step back and get a better look at the balance of ESG across all dimensions of their business instead of just focusing on and placating investors.

On the flip side, it could benefit your company greatly to get ahead of shareholder pressure and begin building out a robust ESG plan early in case you might wish to take your company public in the future. Prior to the 2019 Business Roundtable statement redefining the purpose of a corporation in favor of a more stakeholder capitalism-focused view, most of the discussion in the space was about creating value for shareholders; concepts of fiduciary responsibility came first and foremost. The new statement makes it clear that businesses must understand value in the context of a global economy and society. There is a weighty risk management element to ESG, and investors will be looking at this as well.

A changing regulatory landscape

Similarly, private companies occupy a unique space in the regulatory landscape. At the moment, ESG (and, more specifically, climate change) regulations have most heavily impacted public company operations. These regulations on public companies will apply if you decide to take your company public. Private companies that hope to go public therefore have a chance to get ahead of regulation and begin compliance sooner rather than later to smooth out transitions in the future. This can only further optimize business transformations.

In the meantime, market reports suggest an acceleration in regulator focus on ESG, and this focus will soon flow toward private companies. In May 2021, President Joe Biden signed the Executive Order on Climate-Related Financial Risk. This executive order, relating specifically to private companies, allows the federal government to measure and report on climate-related financial risk in government contracts so that regulators can effectively assess private companies when it comes to sustainable business practices. This sweeping change in regulation is expected to be replicated in other geographic regions outside the United States. The message is clear: Regulation is coming for everyone.

How to start

For many private companies, the short answer might be that you have started. In many cases, building an ESG plan is first about organizing, connecting and labeling actions already taking place and then building on those. Many small private or family-owned businesses already give back to the local community through a corporate social responsibility program. These might be functions that you never thought of as ESG, but they serve as a great foundation for a more robust and expansive plan. The big idea is to look at what you are already doing and incorporate it into a broader strategy.

The important thing to remember is that there is no one-size-fits-all approach. What your company can and should contribute will differ based on your location, industry, size, mission and values. You should consider not only how ESG fits into your company, but also where your company fits into ESG. ESG is no longer a check-the-box activity, a tack-on or a nice-to-have. In order to survive and create long-term, sustainable value, ESG must be built into the strategy of a company.

 

Dottie Schindlinger is the executive director of the Diligent Institute.


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