Why Leaders of Private Companies Should Care About ESG

For years, much of the conversation around ESG benefits focused on the increased interested by shareholders and the positive returns of ESG stocks and funds, but private companies also have good reason to focus on ESG.

Recently, several leaders of privately held companies asked me to sit down with them to help them and their boards/executive leadership teams understand why, as a private company, they should be thinking about integrating ESG into their business strategy.

I took a deep breath before responding, as I have to share that I was a little surprised to hear that smart, experienced leaders are asking this question in 2023, but as I shared the benefits and easy ways to start, they all were excited to jump in. Some were already incorporating some great initiatives and didn't realized that they were part of ESG, such as DEI and and a compensation rationalization. I now better realize that even though this information has been "out there" for many years, many leaders are often heads down and solely focused on implementing their current strategy, often with blinders on, until there is a significant reason to veer down a different path.

I'm happy to share that all of these teams decided to move forward with integrating ESG (in their own unique ways) into their business strategy moving forward. These conversations made me realize that this information would be helpful to many others as well.

Every organization will approach ESG differently based on your industry, location, regulations/requirements, finances, company values, mission and leadership style.

In other blog posts, I've shared the WHY for ESG, ESG benefits, and how to start including ESG in your strategic priorities. But as a quick reminder, ESG benefits (when implemented properly and not just ticking a box) include increased employee engagement, better customers experience, and a more collaborative and integrated relationship with business partners and the wider community you support and serve, as well a healthier planet - all leading to greater profits. When you're better connected with the people who support your business from the inside and out, your business grows. There is endless data supporting this. Moreover, freed from many of the short-term pressures and regulatory disclosure obligations of public companies, private companies can lead in this area to their competitive advantage.

From our conversations over the past year, many CEOs of private companies are also paying close attention to—and demonstrating strong leadership on—ESG. And for good reason, while most ESG regulations and reporting requirements are aimed at public companies, ESG is far more than a compliance issue. Companies—both public and private—are vulnerable to pressure from the public, and ensuring ESG issues are integrated into your business strategy can create significant competitive advantages. Recent conversations with senior executives shed light on some of these advantages.

Below are a few reasons privately held companies are taking ESG seriously and should motivate others to get on the path to do so:

1) Strengthen and Secure Relationships with Business Partners

ESG is an increasingly important factor in business partnerships and procurement decisions. Many organizations are looking to do business with partners and suppliers who can demonstrate strong ESG initiatives. One senior executive from a privately held manufacturing organization shared:

"Our company, and many of our competitors, are beginning to assess their partners’ sustainability programs and are developing long-term goals for steering our supply chains to companies that meet key ESG criteria, such as specific ESG scores or reporting requirements. "

Also, many government contracts (at all levels of government), require certain ESG criteria are being implemented and reporting requirements are being carefully followed.

Also, in the most recent poll of CDP Supply Chain program members, almost 3 out of 4 companies said they expect to de-select suppliers based on inadequate environmental performance. Companies that want to secure access to successful business partners will need to take ESG issues seriously. A large number of executives shared that, at this time, they are simply looking for evidence of an ESG program and are unlikely to deselect suppliers (today) for not providing ESG data. However, if an organization is not even talking about ESG, in whatever aspect is important to the hiring partner, they will not consider them for future partnerships.

2) Create Value from Procurement in Addition to Managing Costs

Several procurement leaders shared that while purchasing departments still focus mostly on pricing today - cost is and will always be a foundational part of procurement’s raison d’être - they are looking to expand the focus beyond cost to unearth other sources of value. What else could be valuable, you ask?

Here are some areas of value for procurement to consider beyond cost reduction:

Supplier relationship management (SRM)

Procurement can focus strengthening relationships with suppliers to improve communication, collaboration, and transparency. This can lead to a better quality experience for the business and customers, faster delivery times, and more innovative solutions.

Risk Management

Procurement can also focus on proactively identifying and mitigating supply chain risks such as disruptions, delays and quality issues. This can involve diversifying suppliers, developing contingency plans and implementing quality control measures.

Sustainability

Procurement can prioritize sustainable sourcing practices to reduce the environmental impact of the supply chain. This can involve sourcing from suppliers with strong environmental policies, reducing packaging waste, and improving energy efficiency, all leading to a decrease in costs.

3) Spur innovation

Integrating ESG into your business will spur sustainability-focused innovation. When you prioritize environmental sustainability, the way you work will need to change. You'll need to carefully assess your current state (across all aspects of your business) and desired future state and see where the most feasible and best opportunities to change are for your business. Do they include reformulating your product, changing packaging, creating new products, focusing on a new distribution channel? There are many ways to innovate. You need to decide which is best for you and your customers. A chemical company executive notes:

"We are excited about the new level of innovation at our company. We are looking to make our products and manufacturing processes more sustainable and to reduce our own carbon footprint. But the bigger impact comes from our products being more appealing to our customers and helping them to reduce their carbon footprints. At first, we weren't sure if the investment up front would be worth it, but it has paid off many times over by the significant growth in our customer base and the deeper relationships we have with our customers."

4) Deepen the Relationship with Your Customers

An authentic and well designed and implemented ESG strategy can serve as a powerful tool for an organization to deepen its relationship with customers. By aligning business practices with values that resonate with customers, such as sustainability, social responsibility, and ethical governance, the company demonstrates a commitment to broader societal concerns beyond profitability. Transparent communication about ESG initiatives fosters trust and loyalty among customers who increasingly prioritize ethical considerations in their purchasing decisions. Moreover, engaging customers in the company's ESG journey, through initiatives like community involvement or environmental campaigns, not only strengthens brand affinity but also cultivates a sense of shared purpose, ultimately creating lasting and meaningful connections with customers.

An executive from a fourth generation family-owned business shared:

"We have evolved from producing and distributing several flagship products to having multiple lines of products across varied industries. Over the past few years our innovation efforts have been focused on sustainability - driven by feedback from our supplier partners and customers. Our key differentiator is providing our customers with products and solutions that help them meet or exceed their ESG mandates. We are consistently told we are a strong partner due to our ability to listen to their needs and consistently innovate to help them achieve their goals."

If you're not already on the ESG journey, it may be a significant missed opportunity: Deloitte’s Global 2021 Millennial and Gen Z Survey finds that ESG issues (such as the climate crisis) are among the top concerns for Gen Z and Millennials and more than 3 out of 4 consumers are changing their purchasing preferences based on ESG issues, a 2020 Capgemini Research Study indicates.

"Many of our products are sold Direct-to-Consumer (DTC), so we look to our customer to help us understand what their expectations are. When we develop new products, we ask ourselves: What can we bring to market that will meet the needs of our customers and make a difference in the world? We also significantly reduced our packaging based directly on customer feedback and this was a significant cost savings for us and made our customers very happy!"

But authenticity is crucial. Your business can't have a history of poor social or environmental choices and then suddenly run a greenwashing campaign to jump on the ESG bandwagon. Consumers are way too smart and savvy to fall for that. Companies need to ensure that their ESG efforts are viewed not as ancillary but as fundamental to furthering the company’s mission. To ensure authenticity, ESG efforts should be anchored in the company’s business strategy, culture and messaging.

Building an ESG strategy cannot be done in a silo, so look to what is working well for others in your industry and outside to determine which activities align with your mission/vision and strategy.

5) Risk Management

Companies that integrate ESG into strategic planning gain visibility into the risks and opportunities associated with current and emerging societal issues. By doing a deep dive and shining a light on certain aspects of your operations, companies are not only better able to anticipate risks to their business, but also better positioned to pivot their business models to capture new business opportunities. While improved risk management is a benefit of ESG integration, for some companies an important upside of ESG is the re-framing of challenges such as climate change from purely risks to innovation opportunities. The chance to explore new or cutting-edge solutions is a key reason companies have leaders across all functions work as a team as planning and budgeting must include all elements to identify and pursue future business opportunities.

Companies that view ESG through the lens of value creation can spur innovation by redesigning products and services or delivering new services and solutions that address environmental and social challenges. Here are some great ideas on how to do this!

6) Employee Engagement

Environmental sustainability matters to people more than ever before, and a company's ESG priorities are a key area where employees are looking for alignment with their employer's values. This is especially true for younger generations, who are particularly interested in working for companies that are committed to sustainable business socially responsibility practices. In today’s interconnected world, where access to information shapes perspective, Gen-Z and millennials exhibit a strong passion for social and environmental issues like climate change and sustainability, diversity and transparency.

CEOs across the globe cite talent attraction and retention as their number one internal focus, per the annual C-suite survey by The Conference Board. Companies with reputations as ESG leaders have an advantage in recruitment and retention as its so easy to find information about a company's culture these days. When thinking about working for or doing business with a company, its important to ask: Does their social media branding align with the comments others have posted? Does their website content align with unbiased news coverage? What is their reputation on sites like Glassdoor and Linkedin?

Working for an environmentally and/or socially conscious organization allows employees to channel their passion and values into their daily work, knowing that their efforts will directly contribute to making the world a better place for all.

The People & Culture leader of a consumer packaged goods firm shares:

"We see our ESG commitment as a competitive differentiator. We have been very purposeful in communicating our strong commitment to sustainability to prospective and current employees, and we are finding that prospective employees want to come to a company with a purpose. They are interviewing us as much as we are interviewing them. Our recent strategic hires have been very much driven by our environmental commitments. Its very important to top talent that they come to an organization that has clear values and truly walks the walk, not just talks the talk."

By making ESG a priority, CEOs can send a strong signal to their employees and prospective employees that the company is committed to a purpose beyond profits. There is good news for private companies: because of fewer public reporting and compliance pressures, private companies may have an advantage in building a sustainability culture among employees. Indeed, heads of sustainability at private companies seem to spend more time on employee engagement and training than their peers at public companies.