Companies don’t win over investors just by issuing sustainability reports and engaging in other standard ESG practices. What they need to do, says Harvard Business School’s George Serafeim, is integrate ESG efforts into strategy and operations. He makes five recommendations: Identify the material issues in your industry and develop initiatives that set your firm apart from rivals; create accountability mechanisms to ensure the board’s commitment; infuse the whole organization with a sense of purpose and enthusiasm for sustainability and good governance; decentralize ESG activities throughout your operations; and communicate regularly and transparently with investors about ESG matters.
The Board’s Role in Sustainability
To build long-term profitability, boards of directors must pay more attention to ESG concerns—and a compelling corporate purpose should underpin their efforts. That’s the contention of the authors, who offer a research-based framework called SCORE to guide boards’ actions: Simplify—define and communicate your purpose clearly; Connect—link your purpose to strategy and capital allocation decisions; Own—ensure that all employees embrace the firm’s mission and have the means to deliver on it; Reward—tie executive compensation to metrics that include ESG performance; Exemplify—use data and narrative accounts to show stakeholders how you’re achieving your purpose and improving sustainability.
The Challenge of Rating ESG Performance
Over the past decade, more and more institutional investors have taken an interest in companies’ records on environmental sustainability, social responsibility, and governance. In this article the head of ESG research at Sustainalytics, which gathers information on tens of thousands of companies worldwide, explains why this data matters and how his firm arrives at its performance ratings. The process involves identifying the risks a company faces, assessing how well it’s managing them, and engaging in follow-up dialogue to ensure accurate analysis. MacMahon also discusses why certain companies’ ratings have improved or worsened and how to put your best foot forward.
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