The report exposed that business leaders’ focus on ESG initiatives greatly varied by geography – country, continent – and company size. With more than 90% of S&P 500 companies and approximately 70% of Russell 1000 companies now publishing ESG reports in some form or another, organizations have been steadily allocating more of their resources toward improving ESG. The rising profile of ESG has also been plainly evident in investments. Inflows into sustainable funds, for example, rose from $5 billion in 2018 to more than $50 billion in 2020—and then to nearly $70 billion in 2021.
More than nine in ten respondents say that ESG subjects are on their organization or company’s agenda. Parsing the data by company size, respondents at organizations with annual revenues of $1 billion or more are much more likely than others to say environmental topics outrank social and governance dimensions on their leadership agenda. Furthermore, 45% of European based companies placed an emphasis on environmental issues over sustainability and governance; that’s a far cry from North America’s 28% emphasis on environmental goals. While environmental topics are recently the ones making headlines in the United States, and the Western world, just one-third of American respondents rank environmental issues as their organization’s greatest ESG priority. In fact, the overwhelming majority of the world’s executives place the highest value on governance.
According to the Journal of Accounting Research’s latest study, the percentage of listed firms linking executive pay to ESG performance jumped to 38% in 2021 from just 1% in 2011. Hiring ESG executives has also been of top priority with specialists developing new initiatives to foment and propel growth within a given corporation. However, the emerging ESG speciality requires a unique set of skills that are still being defined by individual companies and their five to twenty year agendas.
ESG Reports in Relation to Company Growth
In recent years, growing attention has been paid not only to a company’s social impact but its environmental imprint. These initiatives have aimed to gain investor confidence, earn customer loyalty, reduce operating costs, and improve both asset management and financial performance.
Companies have not only sought to bolster their public image but to carve out a brighter and more robust trajectory for the globe’s future. Also, they are seeking to appeal to an incoming Gen Z workforce who have overwhelmingly indicated a desire to apply to companies with an eye on social and environmental sustainability.
Perhaps the most vocal corporations regarding its ESG initiative has been Amazon. With the goal to achieve net-zero annual carbon emissions by 2040, Amazon and Global Optimism – co-founded by Christana Figueres and Tom Rivett-Carnac who oversaw the delivery of the Paris Agreement – banded together with 447 signatory companies across 38 countries to achieve the goal set forth by one of the world’s most impactful companies.
Across Amazon’s production studios, the company is reducing the use of fossil fuels, deploying battery-electric generators, using solar-powered cast trailers, and operating electric vehicles on sets. At AWS, the company has sought to help customers reduce their environmental impact, offering advanced engineering, data centers, and cloud computing that reduces energy and workload carbon emissions.
On a path to powering our operations with 100% renewable energy, Amazon claims to be on track to achieve its goal by 2025, five years ahead of schedule. In 2022, 90% of electricity consumed by Amazon was powered by renewable energy sources, thanks to more than 400 wind and solar projects around the world. Of course, there is a caveat. Amazon uses those certificates to make this metric even though the power being generated isn’t directly powering its operations; nevertheless, Amazon still reigns supreme as the largest corporate purchaser of renewable energy.
Additionally, Amazon has made significant strides in the number of electric delivery vehicles that are now part of its fleet, including 5,000 in the United States. The company’s goal is to have 100,000 Rivian electric delivery vans on the road in just seven years. Meanwhile, 800 million products that were shipped last year were linked to Amazon’s Climate Pledge Friendly program, which was created to highlight options that have been vetted through one or more third-party certification programs. That’s roughly 10% of all packages the company shipped.
Spearheading Amazon’s effort is Kara Hurst, the company’s Vice President of Worldwide Sustainability. She is responsible for leading the company’s sustainability efforts, including setting and achieving its climate goals, reducing its environmental impact, and promoting social responsibility. With over 25 years of experience in the sustainability field, Hurst previously held senior sustainability roles at companies including Microsoft, Johnson & Johnson, and Dow Chemical. She is also a member of the board of directors of the World Resources Institute and the Environmental Defense Fund.
Third-party sellers account for about 60 percent of Amazon sales, and cajoling them into more environmentally friendly practices will help Amazon meet its own sustainability goals.
Amazon unveiled a new initiative, the Sustainability Solutions Hub, at the end of October with the goal of persuading its third-party sellers to reduce their carbon footprints, reuse and recycle more of their material, and cut the amount of packaging they use when shipping products. Since 2015, Amazon has eliminated an estimated 2 million tons of packaging materials, roughly the same weight as 230 Space Needles.
Of course, Amazon has not been without its public relations pitfalls, reportedly generating 465 million pounds of plastic packaging waste in 2019 alone with up to 22 million pounds of it polluting freshwater and marine ecosystems. Recently, Morgan Stanley Capital International, or MSCI, a New York-based investment research firm, downgraded Amazon’s from A to BBB this past summer. MSCI uses that scale – which runs from AAA to CCC – to tell investors how well a company is doing on several non-financial factors that may matter to shareholders like carbon emissions, executive pay, and diversity.
Concurrently, the Science Based Targets initiative, a United Nations-backed entity that validates net zero plans, has removed Amazon from its list of companies taking action on climate goals after the tech behemoth failed to implement its commitment to set a credible target for reducing carbon emissions. The removal followed a change in SBTi’s policies that gave companies a six-month grace period to set a target before marking them as “commitment removed” on a public dashboard. Publicly, Amazon pushed back, stating that the organization’s requirements changed, making it difficult to submit a target in a “meaningful and accurate way.” The company says it is still in contact with SBTi as well as other organizations to set science-based targets.
Different organizations may have varying metrics when assessing a particular company’s ESG score, and most ESG ranking systems consider the exact formula for a grade to be proprietary information. Nevertheless, accepting Amazon’s ESG interests at face value, what does it mean when a tech giant – even with the best of intentions – fails to accurately disclose and create reasonable sustainability goals and markers for the future? Do shareholders, investors, or even the average individual care?
While acknowledging there may be some exceptions, the formation of these initiatives suggests almost uniformly and resoundingly – yes. However, there is still a deep disconnect behind the terminology and labeling of ESG and its tenets.
Communications Challenges: E-S-G
As a broad, three pronged corporate-devised moniker ESG is not connecting with the average consumer. Overwhelmingly, the data indicates that bundling global, social, and governance issues together under a singular blanket term has not resonated culturally. A recent Gallup poll conducted in April revealed that only 37% of Americans currently report being “very” or “somewhat familiar” with ESG, unchanged from 36% in 2021. Another 22% today are “not too familiar” with ESG while 40% are “not familiar at all.”
Fortune 500 companies have failed to signify and adequately promote their ESG intentions to the general public. When it comes to business and investing, 59% of people have no opinion on whether ESG should be a factor. The remaining respondents are closely split: 22% view ESG as positive in business and investing, and 19% see it as negative. Evidently, there is a profound confusion not only as to the terminology applied to social and environmental issues, but most large scale companies have failed to adequately teach the general public about ESG when it relates to long term investments.
Promoted by the Biden administration, the United Nations, and other global organizations emphasize ESG incentives are intended for companies to avoid material financial risks from climate change, labor disputes, human rights concerns in a company’s supply chains, and poor corporate governance and related litigation. While the common notion may be that ESG principles are a function of left wing politics, befuddlement as to ESG’s meaning ran across the political spectrum. The polling clearly depicted that both political parties had little to no understanding of ESG as an acronym. Fewer than 40% were familiar with the term (38% Democrat to 32% Republican). Gallup’s own director of U.S. social research, Lydia Saad commented that ESG is also “not an intuitive subject that’s easily understood from the acronym or relatable in the context of most Americans’ daily lives.”
How can ESG initiatives stand a chance of swaying investors, shareholders, or even affect public policy if the overwhelming majority of the American public has little to no understanding of its meaning?
Needless to say there is a very real opportunity here, not to just improve the perception and practical benefits of ESG, but to hire ESG leadership that can effectively communicate the benefits and importance of this work.
ESG Investment in the Startup Space
While companies like Amazon have retroactively begun initiatives in order to keep up with corporate trends, many startups continue to pop up with ESG as a pivotal and foundational element of their mission statement as well as their day-to-day operations. One such innovator in this space has been Plantd. An environmental entrepreneur, author, and media personality, Plantd CEO Josh Dorfman was recently Site Director of Vine.com, an e-commerce retailer specializing in natural, organic, and sustainably-made products which he developed and launched for Quidsi, a subsidiary of Amazon.
Dorfman’s latest venture is the eco-upstart Plantd, which has developed structural panels for residential homes that are carbon negative and made of fast-growing perennial grass instead of wood. The panels are designed for wall sheathing and roof decking as a drop-in replacement for OSB with zero trees harmed (or cut down) along the way. The process saves 17 trees per house, and Plantd’s factory emits 71% less CO2 than your average timber plant. Plantd has been nominated as a finalist for Most Innovative Materials as part of its Innovation by Design Awards in the Materials category. Meanwhile, Build awarded the company its 2023 Sustainability Excellence Award; and the NAHB recognized Plantd as 2023’s Most Innovative Startup.
Building an ESG mission into the product itself, Plantd was able to raise $10 million in funding. Dorfman stated, “Investors see Plantd as aligned with where the world is headed. We can quickly and profitably remove carbon from the atmosphere and lock it away without relying on carbon credits to underwrite our business model.” Dorfman brought on Nathan Silvernail, COO, and Huade Tan, CTO, who worked together for years at SpaceX, designing and building systems and components to keep astronauts alive on the Dragon spacecraft. Applying their knowledge and experience at Plantd, operations are centered in the Raleigh-Durham area known as the Research Triangle. The region met all Plantd’s key criteria: access to a massive housing and construction market surrounded by millions of acres of farmland combined with world-class universities offering an extensive pipeline of engineering and agriculture talent and all located within a vicinity offering an affordable and high-quality of life, especially compared to other tech hubs around the U.S. Better still, Plantd has put once defunct tobacco farms back to work, growing the raw material for their carbon-negative building materials. The more we buy Plantd materials, the more carbon we sequester. With a communications pro like Dorfman at the helm, we are going to see more companies like Plantd popping up in the years to come.
As the E, S, and G become more clearly communicated and easily discernible on their own, this new modality for assessing and quantifying what recently was referred to as corporate social responsibility, will only gain traction. With more ESG built into the products and corporate fabric of new companies, and more corporate will at the top of companies like Amazon, these acronyms will continue to resonate with smart employees and consumers alike, looking to go deeper as individuals. While ESG might not yet be the investment equivalent of profit, as ESG continues to align itself with innovation like Plantd, its value cannot be denied.
