The role of ESG and purpose

Answering three questions about purpose and environmental, social, and governance issues can help business leaders zero in on what matters most for their organizations.

Purpose and environmental, social, and governance (ESG) issues represent critical chal­lenges for both boards and executive teams. They have become particularly salient since the COVID-19 pandemic, which has forced corporations to scrutinize their responsibilities and role in society. In this episode of the Inside the Strategy Room podcast—one of three exploring the various chal­lenges around ESG—two experts who have long studied the connection between purpose and ESG explain how to align these commitments and embed them in organizations’ lived experiences. Rupert Younger is the founder of the Centre for Corporate Reputation at Oxford University and chairs the Enacting Purpose Initiative, a multi-institution partnership that works to establish best practices around purpose governance. Robin Nuttall is a leader in McKinsey’s ESG and regulatory strategy work. This is an edited transcript of the discussion. For more conversations on the strategy issues that matter, follow the series on your preferred podcast app.

Sean Brown: Robin, can you start by describing the difference between ESG and purpose?

Robin Nuttall: Three things matter when it comes to purpose and ESG. The first is why. Purpose answers the question of why your company exists. What is its positive impact on the world? Why do employees get out of bed in the morning and come to work? That is underpinned by purposeful activity, which often takes the form of environment, social, and governance factors.

The why needs to link to the what, which is your fundamental business strategy. Which markets and product categories do you participate in and which ones do you stay out of? What is your bold commitment to the people and the planet? Finally, the how is the operating model. It is relatively easy to get to a purpose statement that would appear at the top of your website. What is more challenging is making it live in the organization.

Sean Brown: Where is the pressure to focus on ESG and purpose primarily coming from—investors, customers, employees?

Robin Nuttall: There has been a shift in stakeholder attitudes across the board. Start with employees: 70 percent now demand purposeful work. They want the company they work for to take a strong position on social issues. Customers are also making choices in the marketplace based on purpose and sustainability. Millennials and Gen Z have very different attitudes to purpose than baby boomers do and are much more favorable toward sustainable businesses. Regulators are also getting very interested in ESG and purpose. The European Union has already implemented the Non-Financial Reporting Directive [requiring companies to report how they manage social and environmental challenges], and the Securities and Exchange Commission [SEC] has started to evaluate ESG measures in the United States. Then there is the critical investor space.

Sean Brown: Rupert, you have done a lot of research on corporate purpose. Why is it such a focus for stakeholders now?

Rupert Younger: We have observed, particularly in the research over the past two years with the Enacting Purpose Initiative, a return to more balanced capitalism. This ties into the debate about whether Milton Friedman’s ideals about what capitalism should look like need to be revised. This idea that one stakeholder, the shareholder, is all you need to focus on as a manager and board director is being overturned by a global movement challenging that assumption. Capitalism as a concept came into existence in the mid-1800s, but the idea of how business should balance its different stakeholder interests is a tale going back millennia. We are now seeing a return to the idea that business needs to serve the interests of multiple stakeholder groups to achieve the outcomes that it seeks.

Source: McKinsey

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