Should you formalize your ESG policy?
It's more than a passing fad, folks
With the country consumed by questions of racial equality and signs of a climate crisis building, companies are under increasing pressure to articulate how they handle environmental, social and governance (ESG) issues.
While much of the ESG policy discussion is focused on shareholder pressure on public companies, the push to look beyond next quarter’s profits is familiar to many family businesses, says Dottie Schindlinger, executive director of the Diligent Institute, which provides research and commentary on corporate governance practices.
“Family businesses think generationally: How are we going to be around for the next 150 years? How are we going to transition this through the generations?” Schindlinger says. “It’s not surprising that they would also be thinking more long-term about sustainability.”
Schindlinger says this long-term thinking is key to one of the two big trends in ESG policies: climate action. “Companies should articulate what they are already doing in this area — and they are probably already doing something, even if they haven’t formalized a policy — and then look to build on that.”
A second ESG trend — diversity — can be trickier for family-owned businesses.
“For family companies, this can be a loaded issue,” since some may have only family members in leadership, Schindlinger says. “It’s time to think about adding some independent directors to your board, or creating an advisory board, to help you see around the corner. This will help you in many ways – not just with ESG.”
Family-owned businesses may appear to be insulated from pressure from the groups that most often push companies on ESG: regulators, activist shareholders or institutional investors. But they may still face questions about ESG policies from customers, employees or their communities. “Family-owned businesses might not care as much as public companies what the institutional investors are saying, but they are going to care if they can’t hire top talent,” Schindlinger says.
Although the term ESG may be new, for many family businesses, the ideas are not.
“They may call it CSR [corporate social responsibility], or ‘our giving back program’ or ‘how we serve our communities.’ But many are already thinking more holistically about their broader social purpose as an enterprise,” Schindlinger says.
For example, no one was talking about ESG when Raj Gupta’s father started Environmental Systems Design (ESD) in 1967. But the ideas behind the current ESG movement were part of the company, which designs the infrastructure for buildings, from the beginning.
“Our mission is to improve society through the built environment,” says Gupta, ESD’s executive chairman. “We have a strong history of adhering to ESG values.”
Early in the company’s history, ESD hosted high school interns in Chicago, where the company has its headquarters. (Today, it also has offices in New York and San Francisco.) More than two dozen were eventually hired — and some stayed with the company for decades. Today, the company continues its involvement in mentoring programs for young people.
A conservation ethic has also been embedded in the company’s work since the beginning.
“Buildings have a huge impact on things like our carbon footprint and pollution, so by the nature of what we’re doing, we have always had an emphasis on helping the environment,” Gupta says. “Our reason for being is to design buildings in a responsible manner.”
The history is similar for Arlington, Texas-based U.S. Energy Development Corp., which owns and operates energy assets including oil and gas wells, pipelines, gas processing facilities and renewable energy projects. The company, founded in 1980, has longstanding ESG efforts, though they have not always been described that way.
“Some of the components of ESG have been part of our company for 40 years, and part of our family,” says CEO Jordan Jayson, a member of the family that owns U.S. Energy Development. “I believe it’s extremely common in our industry but not well documented and communicated to stakeholder groups.”
ESG policies can be broad or narrowly focused, and they range from general statements of intent to lists of very specific processes. A number of organizations have created frameworks for companies to use, including the World Economic Forum International Business Council, the Sustainability Accounting Standards Board and ISO (the International Organization for Standardization, which created the ISO 14001 and ISO 26000 standards).
Some companies, like U.S. Energy Development, take a very structured approach.
After getting questions from outside stakeholders about the company’s ESG policy, U.S. Energy Development chose to work toward ISO certification for ESG. ISO 14001 certifies that a company has a working and effective environmental management system. ISO 26000 isn’t certifiable, but it is a recognized standard regarding corporate social responsibility. After an external audit, the company achieved the 14001 certification.
“We have always focused on safety and the environment in our operations, as we have always focused on good governance and good social practices,” says Robert Thaxton, a senior strategist with U.S. Energy Development. “This is a way for us to find what items we can improve on, formalize them into goals or objectives, and, most importantly, share this with our stakeholders.”
The certification process uncovered gaps in documentation and communication. For example, the company typically donates turkeys at Thanksgiving to local food banks and charities. Now they include employees when they make the donations and make sure to communicate what they have donated, both internally and externally.
For the environmental management system certification, the company needs policies and processes to prevent and address problems.
“If we have a spill, everyone on location and on our operations team knows how it’s addressed,” Thaxton says.
One requirement for certification is to communicate the company’s annual objectives with employees. (During the audit, some employees are asked at random about the objectives.) And it’s not enough to check the boxes once: Part of the process is setting and working toward annual goals.
“In order to maintain certification, we must show continual improvement of the environmental management system,” Thaxton says.
For example, this past year, U.S. Energy Development decided to focus on eliminating 95% of flaring, a burning of gas that often happens as part of oil production.
The total cost of the internal ESG committee and the audits has been about $75,000, Jayson says.
“It’s been an excellent investment of our time and effort,” Jayson says, pointing to improvements in both company culture and risk mitigation. Some of the risks they are trying to address, for example, could cost the company many times that amount if they occurred.
Certification is not the only route to an effective ESG policy.
Environmental Systems Design has a number of ESG-related efforts underway and is working on metrics to measure them.
“We were doing these things in the past, but now we’re starting to actually measure what we are doing and report on it,” Gupta says.
For example, ESD is expanding its public service work and has prepared a white paper and webinars for building owners to explain how they can phase out HFC refrigerants, which are a significant contributor to global warming, in a cost-effective way.
ESD also mentors other firms on diversity and inclusion efforts. This helps ESD meet some clients’ requirements to show they are reaching out to minority-owned businesses, for example, and it also helps the smaller companies gain a foothold in the industry.
Gupta hopes today’s efforts will be similar to the efforts ESD has made to create a supportive environment for female leaders: “It didn’t happen overnight, but we accepted the fact that great leaders can come from our entire population. Today, we have created a female-led spinoff company, and two of our three offices are run by women. It seems to me that we could use that model as we address racial and cultural inequalities.”
CHALLENGES — AND RESULTS — OF ESG IMPLEMENTATION
Despite these successes, there are challenges associated with implementing ESG policies.
“It’s not always the case that if you do something that’s sustainable, it’s going to pay off in the long term,” Gupta says.
For example: Bringing in more outside air or upgrading air filters, which are recommended for health and wellness, can also add to energy costs. “Our central challenge is figuring out how we can promote health and wellness and do it in a sustainable and cost-effective way,” Gupta says. Gupta uses this tension between keeping clients’ costs low and making buildings environmentally friendly to motivate his team to find cost-effective solutions.
It can be difficult to get a company to operate in new ways.
“Especially for family businesses that have existed like ours for 54 years, sometimes we may get stuck in our traditions,” Gupta says. Traditions are not all bad — they can help solidify the corporate culture, for example. But it’s also important to keep an open mind. “For issues such as diversity, equity and inclusion, I’m not pretending that I have all the answers. I want to do better, and we are learning from other companies.”
One way overcome resistance: Tie new initiatives to the company’s values.
“You’re about something – your family is proud to have this business,” Schindlinger says. “How can you make sure you’re living up to your core values?”
U.S. Energy Development held training sessions for employees to explain the company’s objectives, the certification standards and how the audits would work.
“But even after the presentations, some had questions about how it would impact their job. It was the most challenging part, but it’s also the most beneficial part now that they do understand it,” Thaxton says.
For example, Thaxton says, having every employee buy in to the company’s objectives means they will take action, whether it’s for something small — such as replacing a fire escape route map that has fallen down — or big, like suggesting a way to improve a business process.
“If you just do this as a marketing tactic, to get some positive press, it is likely to backfire,” Schindlinger says. Potential employees and other stakeholders will notice if you make a sweeping statement about combating systemic racism and then do nothing, for example, or announce aggressive carbon goals but then buy more gas-powered vehicles.
In addition, Schindlinger says, some businesses aren’t yet thinking of ESG as a core business strategy but rather as a side element of the business, like giving to local charities or participating in a recycling program.
“They may not yet be fully realizing the value or embracing the opportunity to think about these things as part and parcel of their core business strategy,” Schindlinger says.
How can a company know whether its ESG policy is achieving the desired results?
U.S. Energy Development is using quarterly surveys of employees. From the surveys, company leaders learned that employees wanted a diverse management team and more information about volunteering opportunities.
“We now have a list of volunteer opportunities in our local communities,” Thaxton says. The company also now offers paid time off for volunteering.
U.S. Energy Development has started measuring progress toward some goals, and it has already met some of its goals for this year – “so we know we’re making improvements,” Thaxton says.
As for how the ISO certifications will affect the company’s performance and be viewed by outsiders, the company is working on metrics to measure this, but it’s too soon to tell.
It’s clear, though, that ESG is more than a passing fad.
“I don’t think this is a here today, gone tomorrow type of thing,” Gupta says. “Some things bubble up for a while and then there’s a new story the next week and it goes away. I think this is going to be with us for quite some time.”
Margaret Steen is a freelance writer and frequent contributor to Family Business magazine.