Does communications differentiate shared value from ESG?
It has become a truism that Covid has rapidly accelerated trends that were already evident. A trend we have witnessed at Apella is that many business leaders are optimising their strategy to ensure their businesses are profitable and are having a positive impact across all their stakeholders. Aligning social impact with profitability is what Michael Porter and George Serafeim called shared value.
Maybe they were going to do so anyway, but our experience suggests it has been accelerated primarily by Covid and also by the Black Lives Matter movement following George Floyd’s death.
At first hand we have seen leaders have fundamental conversations about whether they are engaging with society in the best way possible for the long-term sustainability of their businesses. There is the luxury brand with broad customer appeal and a strong track record on diversity and inclusion, that without hesitation responded to #StopAsianHate; there is the large financial services company seeking to accelerate its net zero commitments by a decade; or the firm bidding on a large UK contract, laser focused on the broad social good that would be accrued to all stakeholders if they are successful.
In each of these cases, these companies have been very clear on what makes them unique, in essence what their purpose is. That has been the driving force of developing their strategy. But they have not stopped there, they have put significant effort into explaining to all their stakeholders what they are doing and why they are doing it. Their central premise is that if their stakeholders do not understand their role in the value creation process, then leadership’s hard work is pointless and shared value has been lost.
Effective, creative communications with stakeholders is fundamental to any organisation that is serious about being purpose-led. Communications activity needs to be targeted at stakeholders and also within stakeholder groups. All too often differentiation of stakeholder groups seems to be sufficient, addressing the broad groups of investors, colleagues, suppliers etc. The reality though is that within each group, stakeholders will be focused on very different issues. An effective, sustainable communications strategy needs to reflect that.
There have been some high-profile social value interventions recently that are issues-led. Jamie Dimon, CEO of JP Morgan used the New York Times to fiercely criticise the way that private equity executives are remunerated through carried interest because it fuels social inequality. It was a remarkable comment drawing attention to something that the PE industry tries to dismiss as a necessary structural feature.
A few days later, Larry Fink published his annual letter to CEOs and investors. In recent years, BlackRock’s Chairman and CEO has been driving Blackrock hard on purpose and ESG. This year he doubled down on social impact by focusing on climate change. He was exceptionally clear that as investors BlackRock considered it business critical for all their investee companies to grapple with how they were doing their bit to reduce climate change. If they do not, they face an existential threat.
With Dimon focusing on inequality and Fink on the existential threat of climate change, their comments have potentially far-reaching societal consequences. What has made their comments resonate is who they are and how they communicated their views. Their interventions are part of a trend of company leaders embracing and vocally communicating shared value to distinct stakeholder groups.
None of these examples are ESG initiatives. None are intended to pass an investor’s screening process. All are intended to make the world a better place whilst relentlessly focusing on profit. We believe that communicating to stakeholders their place in a company’s strategy is what differentiates shared value from ESG.
ESG is important, but its primary purpose seems to have developed as an investment screen. By itself, it is not an effective way of communicating with stakeholders. When ESG has primacy, it is often left to the annual report to do the heavy lifting of communicating. TCFD implementation or section 172 disclosures are to be welcomed but reporting on them once a year in a pdf that runs to several hundred pages is too infrequent and static.
A greater uptake of integrated reporting would be more revealing. It would start a debate among one set of stakeholders (investors) about how the company engaged meaningfully with other stakeholders (society). Let alone the engagement it might generate with colleagues within the company.
The adage of what gets measured gets done can be modified to: what gets disclosed to stakeholders, is valued by stakeholders.
This is not a rallying cry for a modern version of the dot com era’s wackier valuation metrics, or more recently WeWork’s “community-adjusted EBITDA”. It is a call for management teams to live up to the promise of a multi-stakeholder world. Many are doing excellent work acting in the best interests of society. There is now an opportunity to demonstrate the value of this by being better at communicating it.
Anthony Silverman, Partner, Apella Advisors