Gambling on Green: Uncovering the Balance among Revenues, Reputations, and ESG (Environmental, Social, and Governance)

GAMBLING ON GREEN

Uncovering the Balance Among Revenues, Reputations, and ESG

KEESA C. SCHREANE

Copyright © 2023 by Keesa C. Schreane. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permission.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic formats. For more information about Wiley products, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data is Available:

ISBN 9781119892090 (hardback)

ISBN 9781119892120 (epub)

ISBN 9781119892137 (ePDF)

Cover Design: Wiley

Cover Image: © Olha Filatova/Shutterstock

To Mom, Dad, and Tiffany: Your love, wisdom, humor, and support have given me a foundation and safe space to imagine and believe that all things are possible.

Acknowledgments

Thanks to my family and friends, whose support made the journey of this book a brighter one.

Much appreciation to my Wiley team: executive editor Sheck Cho, managing editor Susan Cerra, marketing leader Jean-Karl Martin, sales leader Paul Reese, and editorial assistant Sam Wu, as well as my editorial coaches Hilary Poole and Erika Winston, and content editors Alex Joseph and Shivani Rajpal.

Optilytics Media, thanks for the phenomenal support in bringing structure to my external messaging, resources to deliver that messaging, and excitement around my vision.

Thanks to my Ceres partners who provided a wealth of information and support! Thank you to CEO Mindy Lubber, as well as Siobhan Collins, Mary Ann Ormond, Susan Sayers, and Whitney Williams.

A special round of thanks to my London Stock Exchange Group team members and friends who provided encouragement at every turn.

I appreciate my kind, generous interviewees who graciously shared their stories, expertise, and intelligence.

I'm thankful for my parents, my sister Tiffany, and my amazing community of aunts, uncles, cousins, and extended family who give grace, provide prayers, and steadfast support.

Rawlston, I am so grateful for your partnership, perspective, and continued encouragement.

To the Spirit in which I live, move, and have my being.

About the Author

Keesa C. Schreane is a business strategist, commentator, and speaker. Her specialties include the ESG (environmental, social, and governance) space, as well as risk analysis and sustainable finance.

She is a founder, executive producer, and host of Refinitiv Sustainability Perspectives podcast. Recognized as an industry leader, the show discusses global ESG trends, regulations, and investment strategies with asset managers, asset owners, and C-suite sustainability and corporate officers.

She's also a broadcast television and livestream contributor and writer, who has appeared on numerous outlets including Black Enterprise, Cheddar News, CNBC, CBS, Essence, Latina, and Refinitiv Sustainability Perspectives.

Her expertise includes business development, commercial strategy, sales and marketing, employee resource group leadership, relationship management, and sustainable finance. She is a Fundamentals of Sustainability Accounting (FSA) credential holder and is a Certified Anti-Money Laundering Specialist (CAMS).

Keesa serves on numerous boards and committees, including Ceres President's Council where she and other members leverage their expertise to support transforming the economy to build a just and sustainable future for people and planet.

Connect with Keesa at www.keesaschreane.com.

Introduction

To be a good global citizen is to have a balanced perspective.

I've found that identifying how different things interrelate helps me understand how people's actions can reduce the pain of recent events, from pandemics and climate degradation to financial inequity and war. Focusing on interconnectivity helps me to see beyond the devastation. It helps me dare to see glimmers of hope and possibility based on how humans can compassionately respond to these events.

Of course, those glimmers of hope don't negate the realities, tragedies, and impacts that persist.

The potential for a global health crisis loomed for decades and yet somehow still felt like a surprise. COVID-19 directly affected everyone in a manner that many of us had not experienced in our lifetimes. People lived through the illness and death of loved ones, severe business disruption, shutdowns, lockdowns, and of course a lingering sense of unease during travel and in social gatherings. The ways we interact with each other, as well as how we perceive how our health choices affect those around us, are forever altered.

Personal health choices continued to be the subject of scrutiny as the United States Supreme Court overturned Roe vs. Wade in June 2022. Although some corporations swiftly committed to covering costs for employees who need to travel out of state for reproductive healthcare, many Americans still feel vulnerable, angry, and violated at decisions surrounding our health and privacy.

Then there are tragedies resulting from invasions and natural disasters and the disastrous human conditions that result. Heart-wrenching images of men, women, and children fleeing for their lives or confined en masse to small sanctuaries of relative safety like subways or bunkers are all too common. Real-time commentary on social media puts horrific images and stories of war and disaster center stage.

Inevitably these events affect both the economy as a whole and individual financial circumstances. While market watchers marveled at how Wall Street rebounded from the pandemic crash, many of us—and our friends and family—were hit hard by layoffs, downsizings, or our own small businesses having to shut down. Supply-chain resources were stretched or nonexistent. The ranks of the unemployed swelled.

Even before the world could recover from the affects of the pandemic, Russia’s war in the Ukraine caused a worldwide impact. Unfathomable brutality and carnage were nightmares fully manifest on our mobile phone screens. Rising oil prices and increasing food costs provided ongoing reminders of turmoil abroad—contributing to inflation fears, humanitarian emergencies, and food scarcity.

Those of us in the corporate world can no longer afford to ignore the volatility of the wider world. Just as other members of society, corporate leaders have an obligation to help fix what is broken. Environmental health, regional stability, social justice and ethical corporations are intricately tied to not just the performance of the economy and the market but the social fabric of communities themselves. Sustainability, social, and governance concerns intersect with both the private and public sectors. Climate-related devastation is already affecting vulnerable populations—it will not be long before we all are feeling the effects.

As a woman who focuses on creating and maintaining strong business partnerships, my view of these events focuses sharply on the interrelatedness between global phenomena and individuals. I often find myself asking, How can businesses, governments, and other organizations play a role in mitigating negative impacts? This is the lens through which I view the world—by focusing professionally on doing business in a way that strengthens communities and economically empowers employees, partners, and other stakeholders, I can attempt to find optimism and learning within these events, so as to work toward preventative measures and amplify resilience. During these times of political turmoil and instability, employees in different industries and regions began mobilizing to raise funds and deliver supplies to support people in need. This demonstrates that in times of social crises, humans react quickly to help their fellow humans.

Since the pandemic hit, many corporate managers have updated their workplace safety plans to ensure contractors, vendors, and employees are equipped with knowledge about protocols to keep each other safe—both today and as a precautionary measure for future health crises. Internal policy-setting and implementation shows that the heart of policy management and governance is about people-centered, ethical leadership.

The pandemic forced us to reckon with the ways low-income and underserved communities and demographics—such as those with underlying health conditions or who are located near toxin-producing industries and high traffic—are strongly affected by national and global crises. As a result, we saw the government injecting money into environmental and social justice initiatives. There has also been a corresponding drive for corporations to do their part to reduce bias and racial injustice within their companies.

As a result of broader conversations about environmental degradation, corporations have begun to commit to climate action plans with targeted goals for recycling and/or reducing dependence on non-renewable natural resources, and specific timelines to meet those goals. Progressive business leaders are leveraging their resources to help solve for some of the biggest environmental and social issues of our era.

As economic volatility took hold of global markets, many of us were empowered to build our own businesses or start new careers. The great resignation forced employers to reach out to potential workers, offer higher levels of training and compensation, and take their flexibility needs into consideration to attract and retain talent. The silver lining for entrepreneurs as well as workers was a new sense that they can chart their own futures.

Corporate leaders who remain uneducated about the importance of environmental, social, and governance (ESG) considerations will not be leading for long. They not only risk losing customers, but they also risk losing the interest of investors, both institutional and retail. Here are a few reasons why:

Leaders who are unaware of social and environmental policies risk fines, reputational damage, and loss of customers and investors.

Businesses that aren't prepared to compete for employees and investors in this new Green Economy—those that can't adjust their operations toward climate and clean energy awareness—may be incapable of attracting the best talent, customers, and investment dollars.

ESG investments are set to hit $53 billion by 2025¹ and will likely account for one-third of all global assets under management by that time. Investors must move in the direction of ESG—and ensure the companies they invest in do, too—if they expect to support portfolio growth.

Companies are encountering more investors who use proxy voting to hold boards accountable for lack of progress on ESG. These investors have the power to restructure company governance, and vote in new board members who can help these companies pivot toward ESG.

The purpose of this book is to investigate how companies are advancing the ESG agenda, to discuss the role that investors, governments, and NGOs can play in these efforts, and to develop an understanding about how this ESG focus can benefit society, especially those who have been most acutely affected by these negative impacts.

Corporate commitment to solving social and environmental problems through ESG policies and actions requires that the C-suite in particular reckon with their company's own environment, climate, and societal footprint. Just as attaching a unit of value is how a company understands whether a new strategy or product is impacting their goal or target, attaching a unit of value to business efforts on climate, environmental, and societal impact supports a company in identifying if they are meeting their goals toward ESG.

Climate and environmental issues, social issues, and business governance may seem like separate concerns, but they are actually not; they need to be tackled in tandem. Businesses, investors, and other organizations have enormous resources, especially when they partner together. By thinking through ESG considerations, we can approach sustainable business planning in the same methodical way we approach product and revenue planning: hand-in-hand. We've seen that a best practice for sustainable business is not to silo these concerns off in a separate ESG department, but rather to include ESG concerns in all business operations, product planning, and overall risk and opportunity evaluations.

Business leaders are accustomed to managing several issues at once, such as mitigating risk while monitoring costs and simultaneously driving revenue. But for some reason, some corporate participants feel they don't have the resources and/or knowledge to improve their enterprises' environmental and social standings simultaneously. But you can. It's all about shifting how you see things. Changing the lens of how you view the world means changing your mindset; learn to see not just problems, but also see solutions—particularly how you can create solutions from your unique perspective as a business leader. In practice, this means considering climate, innovation, or worker health benefits of a business proposal simultaneously with revenue generation of the proposal. Considering ESG impacts alongside profitability helps us identify risks and opportunities to our businesses, as well as risks and opportunities to our employees, customers, and shareholders who support our businesses. We can walk and chew gum at the same time. The chapters in this book explain how businesses can work with investors, governments, and NGOs to achieve ESG goals, while also achieving revenue goals.

This book is for several groups of people. For corporate leaders, this is a book for those who are seeking to improve existing operational processes and business investments, promoting a greater consideration of ESG within their business model. They recognize that thinking through environmental, social, and governance impacts on operations and investment decisions is a key method for differentiating themselves from their competition. Some of these readers may already be familiar with these concepts but are ready to grow and improve in how they implement ESG considerations.

For other readers, whether their work entails managing an investment portfolio or leading a business, this book may serve as an introduction to the topic, to help them understand what ESG and sustainability mean on a business level—how they affect customers, supply chains, investors, and other market participants. They need clarity on how ESG and sustainability manifests in markets and regions where they do business and where their businesses invest. There is a need for foundational knowledge on how ESG and impact their firm holistically, financially, reputationally, operationally, and from a regulatory perspective.

For all readers, regardless of their level of knowledge, this book is a framework for creating value for customers, society, suppliers, shareholders, communities, and other stakeholders, while keeping up with market demands and growing the business.

Before launching into how an ESG focus can create change in social, climate, and business environments, let's first take a look at how we've arrived at this point. We'll start with origins of impact investing and a history of ESG concepts, how these considerations have grown from relative obscurity in the corporate world, and how they have come to dominate today's business headlines.

Note

1https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/.

Chapter 1

History of Environmental and Corporate Entanglement

In spring 2021, a small hedge fund called Engine No. 1 successfully infiltrated and changed the board of the oil behemoth Exxon. In a series of maneuvers that will surely go down in the history of game-changing investments, an activist investor used stealth and strategy to take over the board. Chris James, Engine No. 1's founder, began his initiative in December 2020 with a focus on reducing and eliminating greenhouse gases from the company's operations, which would in turn help boost long-term profits, especially considering the brutal year that oil companies were experiencing at the time.¹ That strategy ultimately led to seating three candidates on the board who agreed with James about shifting Exxon's fossil fuels focus: a refining executive, a renewable products expert, and a former US Assistant Secretary of Energy.² This was a major coup, considering Exxon was heavily invested in oil and natural gas at the time, with relatively little investment in renewables.³ Since then, there has been a gradual increase in major investments in renewable technologies, but there is still much work to be done.⁴

It's not often that an investor is so determined to shift the very business model of a company with such an unyielding culture as Exxon. As you'd expect, nothing about Exxon's May 26, 2021, shareholder vote on board members was normal. For starters, Exxon's leaders reportedly called for a recess only 40 minutes into the meeting.⁵ Perhaps, this was done to allow time for engaging investors who might be swayed by Chris James et al.'s determination to bring in environmentally focused board members. Typically, a hedge fund with less than $275 million assets under management wouldn't have stood a chance against a Goliath such as Exxon, which was worth around $260 billion at the time of the meeting. However, Engine No. 1 was not alone: additional investors were also advocating for change. As the Engine No. 1 bloc steadily gathered support, it also appealed to investing giants such as BlackRock, Vanguard, and State Street, who held larger stakes in the company. It was the support and votes of these firms that cemented Engine No. 1's success in winning three Exxon board seats (out of four total nominations).⁶

Two key factors were at play during Engine No. 1's historic infiltration—factors that we are increasingly seeing across the investor and corporate landscape.

First, consumers, not-for-profits, employees, and retail investors are demanding that corporations participate in climate- and environment-focused activities, ranging from a reduction of fossil fuel usage, to improved water and waste management. Over the long haul, companies will either change to meet these expectations or suffer the consequences of losing their social license to operate.

Second, institutional investors are responding to these demands that are put forward by staff, clients, and activists outside the company. Investors are using a variety of methods to push companies toward a greener economy, such as insisting on transparency about environmental, social, and governance (ESG) issues, and using their votes to change corporate boards.⁷ Perhaps even more surprising is just how visible the social-change component is becoming; how investors are harnessing resources in the S space as well as the E.

Just like Engine No. 1's ascension to the Exxon board, effective change begins with clear goals. To fully understand how conceptions of ESG have become increasingly integrated with corporate strategy and how this will change the way we do business, this chapter will consider the complex socio-political context that brought us to where we are now with ESG.

Impact Investing: What Is It?

Impact investing seeks to generate financial returns while also creating positive social or environmental change.⁸ It is a nontraditional way of thinking about investing in the sense that impact investors consider a company's commitment to corporate social responsibility as a factor in their investment decisions. In 2016 Sir Ronald Cohen, chairman of Global Steering Group, stated,

Impact investment is a response to the needs of impact entrepreneurs that want to improve lives and the planet in a similar way that venture capital and NASDAQ were for tech entrepreneurs. It is very difficult to separate a market into its components. We need change at the investor level. We need change at the investment manager level, and we need change at the entrepreneurial level. I am glad to say that this change is beginning to be visible to scale.⁹

The umbrella term impact investing is usually understood to encompass ESG and socially responsible investing (SRI). SRI takes the approach of harm avoidance: these investors typically choose companies with similar, or industry leading beliefs around human rights and environmental responsibility.¹⁰ Companies that implement ESG initiatives attempt to reduce their negative impacts on society and create positive ones. The E includes such factors as emissions reduction, embracing renewables, and tackling water scarcity. The S incorporates human rights, health and safety issues, and corporate responsibility. The G encompasses shareholder rights and board structures, among other factors. Largely ignored until recent years, the number of companies publishing ESG reports has increased from 50 in 1993 to over 7,000 in 2015. Change is coming quickly: 37% of S&P 500 companies published ESG data by the end of 2019, but that had increased to 54% by year-end 2020.¹¹

ESG is no longer a surface-level ethical discussion. It has now evolved into a discussion about metrics and relative evaluations of individual companies. The traditional tension between profitability versus responsible investing is falling away as they merge under the umbrella of ESG.

Contrary to widespread belief, the interests of ESG investors are not limited to climate change—as investors are diverse, so, too, are their socio-political priorities. Instead, ESG takes in a wider conversation about corporate change across a variety of disciplines. As the discussion has evolved from mere rhetoric to an urgency for real change, investments are evolving to meet a larger need. Today, more than a third of all the investment assets in the United States fall under this broad category of sustainable and responsible investing. Make no mistake: ESG investing is a key force keeping pressure on companies to prioritize their environmental and social commitments.

Another term that often arises during conversations about impact investment