Seasoned entrepreneurs like Steph Korey know that businesses do not exist in a vacuum – they operate as a functional part of society and, as such, are influenced and affected by everything around them. As people have become more conscious of their daily decisions, corporations around the world have started to transform their business models to respond to evolving consumer demands. Today’s businesses are looking beyond the bottom line and creating internal campaigns to promote social responsibility. Commenting on how this transition can benefit both companies and the communities they serve is entrepreneur and investor Steph Korey. She observes, “For-profit businesses can and should drive positive impact [and], generally, the benefits of ESG-focused business [practices].”
ESG investing – also known as “socially responsible investing,” “impact investing,” and “sustainable investing” – is right in Korey’s wheelhouse. Dedicated to promoting sustainable and ethical business development, she has historically invested in companies founded by entrepreneurs from underrepresented companies. Steph Korey’s investment strategy is based on the belief that while talent may be universally distributed, opportunity is not. Here, she shares her experience in creating a positive impact through her own companies and professional work.
Environmental, social, and governance (ESG) criteria are of increasing importance to companies, investors, and other stakeholders. They are the non-financial factors that measure the sustainability and ethical impact of a business. Each element of ESG can be analyzed to determine the future success of an investment based on targeted goals and implemented models.
Here’s a glimpse of the individual elements of ESG:
- Environmental criteria include the energy a company takes in and the waste it discharges, the resources it needs to operate, and the resulting consequences for living beings. They also include waste and pollution, resource depletion, greenhouse gas emissions, deforestation, and climate change.
- Social criteria refer to the relationships a company develops and the reputation it fosters among people and institutions in the communities where it does business. These factors include employee relations and diversity, health and safety, conflict resolution, working conditions (such as child labor and slavery), and local community relations.
- Governance refers to the internal system of practices, controls, and procedures a company adopts in order to govern itself, make effective decisions, comply with the law, and meet the needs of external stakeholders. It focuses on tax strategy, board diversity, and structure, executive remuneration, corruption, and bribery, as well as donations and political lobbying.
As the world moves toward a more sustainable future, Steph Korey emphasizes the need for new and existing businesses to integrate ESG practices into their business models. However, no single strategy will suit all organizations. Instead, businesses need to identify, develop, and implement a plan that accommodates both their organization’s core beliefs and their customers’ values.
Integrating ESG into Your Business
Single-focused sustainability campaigns are no longer capable of meeting the evolving demands of consumers, says Korey. Today, businesses must adopt an ESG model from the beginning and allow it to grow as the company expands. She notes that companies no longer have to choose between doing a good thing and being successful – these things are no longer mutually exclusive. In fact, those companies that adopt ESG elements into their business model will benefit in the long term. However, because ESG is such a new idea for both entrepreneurs and consumers, the following question remains: How can organizations incorporate ESG strategies into their business operations?
The first step for any business, according to Korey, is to start thinking about how it can integrate ESG elements into its immediate future. Many businesses believe that financial support is the best plan of action. Steph Korey notes, however, that companies don’t need to wait until they can donate money to get started. Instead, they can identify the key talents of their team members and leverage those talents into making a positive impact.
It comes down to organizational leadership. ESG transformation depends on the focus and drive of senior leaders. By connecting ESG initiatives to an organization’s overall direction, committed leaders can make a big difference. Dedication to these initiatives will trickle down through the organization and help improve employee commitment toward achieving the overall goal.
Benefits of ESG-Focused Business
To some, integrating ESG criteria into everyday business operations appears to create additional work – it is a drastic departure from previous business models, and many presume it will have a negative impact on the company’s bottom line. Steph Korey notes, however, that recent research suggests otherwise – businesses and organizations that adopt ESG practices as part of their business model can expect to experience increased returns and long-term success. According to a 2019 McKinsey report, a strong environmental, social, and governance proposition links to value creation in five essential ways:
1. Top-line growth: A strong ESG proposition helps companies tap into new markets and expand existing ones. It can also drive consumer preferences.
2. Cost reductions: Executing ESG criteria can help companies effectively control rising expenses, such as raw material costs and the true cost of water and carbon.
3. Regulatory and legal interventions: A stronger external-value proposition can enable companies to achieve greater strategic freedom, easing regulatory pressure. In fact, in case after case across sectors and geographies, strength in ESG helps reduce a company’s risk of adverse government action. It also engenders governmental support.
4. Productivity uplift: A strong ESG proposition can help companies attract and retain quality employees, enhance employee motivation by instilling a sense of purpose, and increase overall productivity. Moreover, employee satisfaction positively correlates with shareholder returns.
5. Investment and asset optimization: A strong ESG proposition can enhance investment returns by allocating capital to more promising and sustainable opportunities (e.g., renewables, waste reduction, and scrubbers). It can also help companies avoid stranded investments that may not pay off because of long-term environmental issues (e.g, massive write-downs in the value of oil tankers).
Furthermore, Korey explains, ESG goals can help businesses in indirect ways.
Positive Reputation and Media Reception
ESG can benefit companies by creating a positive corporate image and reputation among the media. By contrast, a company that forgoes its alignment with ESG criteria (e.g., by overlooking child labor laws in its manufacturing) can expect to see negative consequences.
Increased Employee and Consumer Retention Rates
The majority of employees and consumers will soon be millennials, a generation that has expressed its preference for change. This youthful group has intentionally pressured old business models to focus on a more sustainable future. Companies that do not accommodate these needs risk losing the loyalty of this generation.
For example, recent research reveals that “by 2025, millennials will comprise 75 percent of the workforce. They have high expectations [regarding] social purpose and expect accountability in the companies they work for. They seek to work for companies that uphold these values and align with their own [worldview]. In fact, 76 percent of millennials consider a company’s social and environmental commitments before deciding to work there.” Furthermore, millennials “have higher expectations [for] the companies behind the products [they use] to operate their businesses ethically and responsibly, and [they] demand greater transparency [in] how they conduct their business [operations]. Millennials are willing to pay more for products and services [they] regard as sustainable or coming from socially and environmentally responsible companies.”
ESG Expectations from Investors
Investors also have growing expectations for ESG businesses and believe that a clear sustainability strategy creates confidence and reassurance that a company has a solid foundation for future success. In fact, a global survey conducted by BNP Paribas shows that the percentage of surveyed asset owners who put more than a quarter of their funds toward ESG increased from 48% in 2017 to 75% in 2019.
Making a Positive Impact
Today’s businesses should assess how ESG can improve their bottom line. Likewise, companies need to consider the desire of individuals and organizations to support businesses that have a positive impact on their local communities. Supporting the community in which they operate and preserving the planet for future generations should be at the forefront of all companies’ operations. Not only does investing in ESG policies and practices serve as an avenue for reaping financial benefits, but it also serves as a way to ensure the future for today’s youth.
Growing evidence shows that adopting ESG criteria has a positive impact on a company’s financial performance and long-term business strategy as well as attracting and retaining a diverse pool of talent. Clear trends exist, and further research will reiterate the importance of ESG practices and policies on the long-term sustainability of companies in these challenging times.
The Future of Business
Global sustainable investing currently exceeds $30 trillion with no indication of slowing down. This acceleration has been driven by consumer demand for corporate transparency and increased investor interest in companies with a strong ESG proposition. Doing something good as a company will no longer meet the changing demands of global consumers. Instead, corporations and organizations need to adopt and integrate ESG concepts into their business models to remain relevant in the future.
About Steph Korey
Steph Korey is an entrepreneur and early-stage investor who focuses on supporting companies and brands dedicated to an ESG model. She is the founder of a $1.4 billion business that has been named Fast Company’s “World’s Most Innovative Company” twice since its inception. Steph Korey previously served as head of Supply Chain at Warby Parker, where she built and led a team that handled the development, manufacture, and fulfillment of physical products.
Korey earned a B.A. in international relations from Brown University and an M.B.A. from Columbia Business School. She has been named to the Forbes 30 Under 30 list for retail and eCommerce and recognized as an EY Entrepreneur of the Year. Korey was also honored as one of Goldman Sachs’ 100 Builders and Innovators in 2018 and 2019.