Corporations have long focused on sustainability, not just to protect their reputations or respond to social activists, but for reasons of long-term profitability and operational efficiency.
Decades ago, automakers realized that it was too costly not to develop alternatives to gas-guzzlers, and energy companies concluded it was too costly not to adopt voluntary carbon caps. What has changed acutely in recent years is the frequency of Corporate Social Responsibility (CSR) and sustainability issues escalating into crises fueled by social media and the 24-hour news cycle.
Further challenging the role of companies as change agents, the millennial workforce wants their employer’s actions to match their own values. During this politically charged year, employees at Google, Microsoft, and McKinsey have tested the boundaries of their new power and influence. These emboldened highly-skilled workers are increasingly behaving like social activists, signing petitions and even threatening to quit over contracts with clients or policies that run counter to their moral standards. Amy Weaver, general counsel of Salesforce, notes this shift towards large-scale social responsibility: “In law school when they ask you, ‘What’s the role of a corporation?’ [The answer] was “just ‘do no harm, give a little back to a little-league [baseball] team.’ There was no concept of companies stepping up the way they are today.”
The new CSR extends beyond philanthropic giving and employee volunteering. While Fortune 500 philanthropic giving is estimated to be over $20 billion, it is just a part of a company’s CSR and sustainability effort, which has now broadened to include a social responsibility lens applied to all business-line decisions, including recruiting, employee benefits and supplier selection. It is not enough to respond to one-off social activist-driven issues. The new CSR is inextricably tied to a company’s brand, its reputation, and its ability to maximize shareholder value. The new CSR must function at the enterprise-level, both CEO-led and considered in the context of overall business strategy and operations.
Larry Fink, CEO of BlackRock, in his January 2018 letter, declared that corporate response to societal issues can no longer be decoupled from the core business. It is no longer enough to deliver quarterly growth and profits. Companies must serve a social purpose or risk losing the full support of one of the world’s biggest investors: “Without a sense of purpose, no company, either public or private, can achieve its full potential.” Framing it more positively, we can conclude that companies that proactively manage the challenges related to their role in society are ultimately exposed to fewer long-term risks and are therefore more attractive to investors.
However, CEOs rarely consider social impact factors in their decision-making. They are inexperienced in marshalling company resources for a mandate to do good. Complicating the task further, the right data is not readily available to enable that kind of decision-making. But the alarm bells have been rung by employees, investors and regulators. Global companies and their boards will be held accountable for their impact at a level that they are generally not prepared to meet. An integrated, data-driven, enterprise-level approach to CSR and sustainability efforts will be required, and these once fuzzy concepts of purpose and impact must be accounted for with the same discipline exacted in key operating divisions. New technologies must be deployed to measure, monitor, and scale these efforts.
Companies have been slow to adopt real innovation and automation to address CSR-related efforts, but that is beginning to change. Early-stage tech companies are developing tools to solve for company-wide nonfinancial data collection and analysis, as well as related business-line pain points. Developing these tech solutions is not and should not be a core competency for large corporations, so the most successful will be the ones that partner with startups to inform their thinking and disrupt their current approach.
Reporting to Stakeholders
Larry Fink’s directives on “profit with purpose,” coupled with warnings from banker Jamie Dimon and investor Warren Buffett on short-termism, are echoed in recent securities legislation aimed at elevating the importance of a company’s impact in society. While still short on specifics, the newly enacted Delaware Certification of Adoption of Transparency and Sustainability Standards Act (“the Act”), effective October 2018, messages that sustainability and social responsibility are no longer just window-dressing. Compliance with the new Act, which is voluntary, will signal that companies are addressing the matter at the CEO and board level, embracing a new level of accountability, and linking CSR and sustainability activity to a company’s business strategy.
The first of its kind in the U.S., the Act lags regulation introduced in the European Union (EU) in 2014, which requires large public-interest entities to issue mandatory nonfinancial disclosures on sustainability and diversity. An alphabet soup of frameworks and standards -- CDP, GRI, SASB, UN SDG, TCFD and many others – already provide guidance on what data companies should make public. Many global exchanges are now encouraging reporting on risks and impact, leading to increasing transparency. And detailed questions on impact and sustainability are frequently appearing in RFPs from potential customers. Some multinationals may opt to comply for reasons of operational efficiency (a single protocol across the enterprise is easier to maintain). But increasingly, companies will see the move as also benefiting their relationship with investors and other stakeholders.
Most companies are not prepared to meet this dramatic shift in expectations. Financial reporting, which corporations are built to handle today, can be accomplished piecemeal with data compiled from different parts of the business and reported quarterly. Nonfinancial data, on the other hand, cuts across business lines. It is scattered within human resources databases, customer relationship management platforms (CRMs), vendor management tools, and in many cases excel spreadsheets, anecdotes, and even photos. Nonfinancial data is also, by its nature, not restricted to a single unit like dollars, but a diverse set of metrics that is more challenging to compile and analyze.
Corporations can leverage new technology to implement a centralized, enterprise-wide approach to meet the avalanche of new reporting requirements. Built-for-purpose platforms interconnect siloes of an organization to capture the relevant data. They use API integration to automate data collection from multiple sources and enable real-time tracking, analysis and reporting. With new tools like Goodera, an enterprise platform that integrates a company’s CSR and sustainability metrics, companies can automate reporting and make the shift from traditional, 100-page printed reports to digitized, real-time dashboards. Abhishek Humbad, CEO of Goodera, notes that “sustainability data from across the business is available in real-time to inform decision-makers, and agile content can be adapted to different stakeholder audiences.”
Adapting to Millennials
The Pew Research Center found that millennials make up more than a third of American labor force participants (35 percent), making them the largest generation in the U.S. labor force. This generational shift, along with growing distrust in companies, has caused fundamental change in what employees want. In addition to a career and fair compensation, employees today are looking for a higher sense of purpose and an employer whose values reflect their own. A study conducted by EY and the Harvard Business Review found that 89 percent of executives surveyed said a strong sense of collective purpose drives employee satisfaction, which leads to better business results. Inspired employees, it turns out, do better work.
Another step to accommodate this new employee dynamic is promoting volunteering or pro-bono work as an outlet to serve and opportunities for team bonding. Goodera co-founder Richa Bajpai notes, “Companies are using volunteering platforms to replace costly and logistically challenging firm-wide volunteering days, boosting morale and improving community engagement.”
Over 43 percent of millennials are multicultural, so the shift is not just generational; it’s also about diversity and inclusion (D&I). Weight Watchers CEO Mindy Grossman explains that diversity is not a box to check off but is foundational to her overall business strategy: “There is clear qualitative and quantitative evidence that more diverse companies are going to have greater long-term sustainable success. When you think of who you want your partners to be, who you want to invest in, and what you want to do, don’t you want to do that with people who want to have the greatest long-term success?”
“The question [for companies] is no longer ‘Is diversity an issue? ‘but is ‘How do we fix the diversity issue?’” said Frida Polli, CEO of Pymetrics, which uses neuroscience and artificial intelligence (AI) to match candidates to jobs where they are most likely to succeed. A neuroscientist-turned-CEO, Polli proposed a ‘diversity tech stack’: a compilation of best-in-class early-stage tech solutions proven to improve diversity outcomes for global companies. Jopwell, one such startup in the diversity tech stack, uses technology to help companies connect with and recruit underrepresented ethnic minority candidates. Porter Braswell, CEO of Jopwell, notes that “clients like Peloton, Pinterest, and the PGA understand the importance of having a workforce that is reflective of the broader population and are committed to ‘getting it right’.” Jopwell also frequently advises its clients on broader operational imperatives, informing a larger diversity strategy, including marketing and consumer insights. Companies looking to lead on this front are not silo-ing their D&I efforts and, ironically, might not explicitly have a head of D&I. Instead, the efforts are often led by the CEO, who is actively infusing concepts of diversity into their ethos, brand, and corporate purpose.
Consumers are also changing how they engage with brands and raising their expectations of these entities as change drivers. “People are looking to brands to deliver some kind of purpose, some sense of identity that reflects their ideal self,” explains BlackRock CMO Frank Cooper. “The brands that understand that are extracting great value from it.” To better engage an elusive customer base, fast-fashion retailer H&M is trying to become part of a ‘more sustainable fashion future’ through its Rewear Reuse Recycle campaign. It rewards customers who donate used garments with a discount off their next in-store purchase. Not only does the offer bring H&M customers back into the store with an intent to purchase, but a simple gesture lets them become part of the solution by donating a t-shirt to protect the planet.
Many companies are using technology to communicate their purpose and social impact to customers directly. Kevin Johnson, CEO of Starbucks, doubled down on an already aggressive digital customer strategy, aiming to build an authentic relationship with customers in new, interactive and scalable ways: “We have to be more agile as innovators.” Starbucks’ numerous digital touch points strengthen the company’s position with customers as a purpose-driven business. Johnson sees increasing digital engagement with the Starbucks customer as one of their brand’s unique and core assets.
Start-ups are using social media to help companies build these one-on-one relationships. Carlos Garcia founded HYP3R to help companies identify and engage individual customers in a geo-fenced location to capture all public social media activity at that venue (stores, stadiums, hotel properties). Garcia found that “one-on-one engagement is the best way to engage authentically with customers, earning trust and building community. Happy customers have a unique power to lead others your way.” Brands need to tap the innovation of start-ups to develop existing and customer relationships and to scale these interactions.
Mitigating Risks in Supply Chain
Most companies proactively managing their social and environmental risks focus on their own business operations. However, they often overlook their supply chains, where, arguably, most of the risks may be found, and unwittingly leave themselves exposed to financial, operational, and reputational risks related to their vendors and partners. In recent years, companies like Unilever and Nestlé have found some of their global vendors in breach of sustainable sourcing standards and suffered supply chain disruptions as a result. The UK-based CDP supports the disclosure of environmental impact in an effort to make environmental reporting and risk management a business norm. Data from over 6,000 companies that publicly disclosed through CDP has shown that, on average, greenhouse gas emissions in supply chains are 4x as high as in a company's own operations.
Rod Robinson, CEO of ConnXus, a supplier diversity and risk management platform, started his company to solve for his own pain points as a Chief Procurement Officer. In that role, Robinson observed how a diverse supply chain benefited his then-employer: “Casting a wider net for suppliers often led to the discovery of new, innovative suppliers that came with higher-quality, better performance, and cost savings. This helped us build a more responsible and sustainable supply chain that delivered economic impact, helping to grow small businesses. It also enabled us to build loyalty among our suppliers that resulted in better financial results.” At the time, there were no integrated, automated tools to source, monitor, assess risk, and reliably report on the economic impact of a diverse supply chain, so he built a technology platform to do just that.
With suppliers and local communities becoming increasingly important corporate stakeholders, the supply chain is likely to attract more scrutiny. The new network of relationships resulting from a thoughtful supplier diversity strategy will help companies create a pattern of consistency demonstrating that it “walks its talk.” It will further build trust and brand authenticity and help establish a verifiable corporate track record. Building these new vendor networks is not just an effort to do good but will develop risk-mitigating assets that will strengthen a company’s reputation and increase the brand’s resilience longer term.
Trust and Technology
Trust takes years to build and minutes to destroy, so effectively managing a company’s reputation is a critical element of long-term financial success. BlackRock CMO Frank Cooper explains: “The days in which you can say one thing and do another are long gone. Because the lag between the time that people hear what you say and see what you do is virtually zero at this point. There is no lag. And you will get called out.” As expectations from a diverse set of stakeholders -- investors, employees, boards, consumers, suppliers, communities, and regulators – continue to shift, technology will offer CEOs a key to solving for these new corporate challenges. Partnerships with technology startups innovating around CSR and sustainability will be a critical piece of the puzzle, enabling companies to demonstrate transparency, consistency, and accountability. Companies will need to up their “purpose” game or risk losing control of the narrative around their brand. And CEOs will need to step up to lead in this new role.