ESG and its Future

Sara Zellner, CEO and social impact changemaker who focuses on maximizing a company’s efficiency, leadership, and corporate social responsibility by guiding them through the ESG world. She helps companies with their sustainability strategies, operations, partnerships, and then how to leverage all of it in their communication efforts. Great podcast to get up-to-speed on ESG, its future, and how to weave it into your marketing.  https://www.lynzconsulting.com

Transcript

Triple Bottom Line | Episode 46 | Sara Zellner

[Upbeat theme music plays] 
Female Voice Over 
[00:03] Welcome to the Triple Bottom Line, where we reveal how today’s business leaders are reaching a new level of success with a people-planet-profit approach. And here is your host, Taylor Martin!

Taylor Martin 
[00:17] Hello and welcome, everyone. I have Sara Zellner on today. She is a social impact changemaker who focuses on maximizing companies’ efficiencies, leadership, corporate social responsibility by guiding them through the ESG world, helping them with their sustainability strategies, operations, partnerships, and how to communicate it all. I’m so happy to have her on the show today. Sara, please tell our listeners a little bit more about your background and how you moved into the ESG space.

Sara Zellner
[00:46] Yeah, well, thank you for having me, Taylor. My name is Sara Zellner. I’m the CEO and principal of Lynz Consulting, LLC. We’re a consulting firm that specializes in assisting companies to create environmental, social, and governance, and corporate social responsibility strategy, programs, and communications. I’ve always been interested in the broader impact that we human beings have on our world. As a result, I got a PhD in sociology. I then went on into management consulting where I focused on public private partnerships. Up until that point, I’d simply presumed that a business’s sole purpose was to make a profit, perhaps naively. However, working on public private partnerships reframed my thinking to allow me to better understand that the private sector has a role as social environmental stewards and that inspired me to found Linz Consulting.

Taylor Martin
[01:39] I can completely agree. Everything you were saying, I was like, yeah, yeah, checking my boxes. Let’s get into the specifics because there’s some listeners out there that may not fully understand ESG. What is ESG and how does it work?

Sara Zellner
[01:51] Yeah, so as I already referenced, ESG stands for environmental, social, and governance. It’s a set of standards for a company’s operations that socially conscious investors use to screen potential investments. The environmental criteria consider a company’s environmental impact, like climate change, resource use, and pollution. The social criteria examine how a company manages relationships with stakeholders, like their employees, suppliers, customers, and their communities. Then finally, governance deals with internal management and a company’s transparency around topics like anticorruption, executive pay, and board composition. Now, for companies to convey their work in ESG to investors and other stakeholders, several international organizations have established standards for companies to use as guidance in their ESG reporting. They include standards organizations like the Global Recording Initiative, GRI, and the Task Force on Climate-Related Financial Disclosure. Interestingly, there’s no one set of ESG criteria that all companies disclose, but some reporting standards do have industry specific disclosures. Then there are ESG ratings agencies. These agencies take these standards or use their own internally developed ESG metrics to evaluate a company’s ESG to determine its overall ESG score. These include firms like Bloomberg, MSCI, and S&P Global. Then investors in turn use these reports from the ratings agencies to see how sustainable a company is, which allows them to better determine which ones to invest in.

Taylor Martin
[03:39] Why is ESG important to companies?

Sara Zellner
[03:42] In today’s socially aware business climate, addressing ESG issues is critical to a business’s long-term success. Many institutional investors now expect the companies they invest in to be proactive about ESG. This is a major reason for publicly traded companies to incorporate ESG into their business operations and communications. ESG programs are good for business. Sustainable and impact investing has increased 14-fold since 1995 to $8.7 trillion. That represents about one of every six dollars under investment fund management. ESG investors typically differ from the average investor. They’re more values based, investing in what’s morally important to them. They also understand that change takes time. They’re more apt to stick with a company that’s committed to improving its ESG.

I will add that there are many advantages of integrating ESG into businesses that aren’t publicly traded, too. Companies that recognize the importance of ESG and adapt to evolving social and environmental issues can better identify strategic opportunities and distinguish themselves from their competitors. The C-suites that take steps like improving labor conditions, enhancing diversity, equity, and inclusion, DEI, giving back to their communities, and taking a stand on environmental sustainability strengthens the company’s brand, too. From a generational standpoint, Millennials and Gen Z employees and consumers, they’re more socially conscious and more mindful about linking themselves with companies that are dedicated to ESG. Companies that adopt ESG can benefit from employee and customer recruitment and retention of these generations. Finally, ESG also appeases activists, or at least it can. Activists are concerned, and rightfully so, about social and environmental issues. They often target companies that don’t pledge to improve their social and environmental practices. By investing in ESG, companies can please all of their stakeholders.

Taylor Martin
[05:47] Yeah, agreed. ESG has been growing leaps and bounds over the years. I’ve been sitting here watching it just catch on more and more. That much money under investment is amazing. It’s also, like you said, about – I see it as people voting with their dollars. If your brands are performing well and doing ESG quality or UN development goals, give them your money, but if they’re not, you don’t have to. You can find someone else. Find someone else.

Sara Zellner
[06:16] Yeah, absolutely. I think there’s definitely movement in conscious consumerism. People being, as you mentioned, just more thoughtful about where they spend their money and whether where they spend their money truly aligns with their own values and their own beliefs. I think that trend will just continue going forward. As generations just become more aware of the environmental issues, in particular climate change, that will continue to affect our world.

Taylor Martin
[06:51] Yeah, agreed. People say that when I say the triple bottom line, they’re always like, “That sounds interesting. What is that?” They might say, “I think I’ve heard that before.” I’m always like, whenever I think of it, I always think of it being coined like in 1996 or something. Then CSR came into play and now it’s ESG the last ten years or so. Some people do know what CSR is. Can you tell them the difference between CSR and ESG?

Sara Zellner
[07:18] Yeah, I can. Going back to ESG, so ESG, again, is a criteria the investors use to screen companies that they could potentially invest in, whereas corporate social responsibility, or CSR, is the overarching business model where companies work to address the impact that they’re having, both socially and environmentally. Beyond their core business, companies that practice CSR actively work to improve our society and our world. As for the interaction between the two, you can think of CSR as the overarching strategy that companies use to better society and the environment while ESG is centered on the measurement and reporting of a company’s CSR activities. That’s really the difference between the two.

Taylor Martin
[08:04] One’s more like a marketing piece and the other one is more like hard numbers.

Sara Zellner
[08:07] Yes, you could kind of think about it that way. Think about it more as like the programmatic aspects and the execution of what the ESG is doing, but the ESG is really the core reporting and measurement that allows the investors then who invest in these companies to be able to judge and determine the validity of a company’s ESG activities.

Taylor Martin
[08:33] Yeah, I can’t help but try to shrink things down to be an incredibly succinct simple message.

Sara Zellner
[08:41] Yeah, nothing’s ever simple.

Taylor Martin
[08:43] You and I were talking earlier. How does a business create an ESG strategy? What kind of research is necessary for something like that?

Sara Zellner
[08:52] Yeah, so with an ESG strategy, an ESG strategy should be created to fit a company’s industry, their mission, their priorities, and any other regulatory compliance that needs to be followed. To develop an ESG strategy, we use a materiality assessment. That’s a very jargony term within our field, which is a method to identify and prioritize the issues that are most important to an organization and its stakeholders around ESG. We identify specific reporting frameworks that will be followed, such as the Global Reporting Initiative that I referenced earlier or the United Nation’s Sustainability Development Goals, among others. Then doing benchmarking to determine what competitors are measuring and monitoring is also helpful to set a baseline for a company’s ESG efforts.

Basically, then I mean, in the materiality assessment in the grand scheme of things to build out and refine the ESG strategy, we identify who the company’s stakeholders are and how they should be prioritized to inform the ESG strategy. Then we gather feedback from them via surveys and interviews about their ideas for the company’s ESG priorities. After all this data is analyzed and it’s determined where these ESG priorities lie, then we create an ESG roadmap that lays out the company’s ambitions and goals. This roadmap essentially explains the company’s ESG rationale, targets milestone, and basically how to obtain buy-in from stakeholders. Once that ESG strategy is solidified, then the company can begin executing on it.

Taylor Martin
[10:38] My mind goes to wonderful, awesome, I love it, yes, sign us up, but then I think, how many companies actually do have an ESG strategy as opposed to just kind of doing their job and then just dumping in the numbers and checking the boxes?

Sara Zellner
[10:51] There are actually a lot of companies that now have ESG strategies. In terms of ESG and its development, particularly because investors have become so interested in it, adoption rates are, to my knowledge, around 1,000 companies or more. I mean, we’re talking a very large percentage. I could be off on that, but percentages could be like around 70%, 80% of publicly traded companies that have now adopted ESG. I mean, it is really quite high and impressive and good to see just from a social standpoint and an environmental standpoint that these companies are truly invested in bettering the environment, in bettering their own governance, in bettering our society. It’s been an amazing development over the past several years.

Taylor Martin
[11:44] I concur. I have been seeing ESG grow so rapidly. I’ve really been commending companies to do that. My only fear is that are we doing enough because of the impeding future we have coming at us here. I want to talk about some people’s perception of ESG. There’s a lot of – I don’t want to say naysayers, but some people have heartburn over ESG not being a one size fits all, meaning one market reports may not match what another market segment reports. How do businesses overcome that?

Sara Zellner
[12:17] Yeah, it is a challenge. Standardization is a challenge in ESG. For now, businesses will need to continue to choose which reporting standards they wish to adhere to based on their ESG strategy. However, there has been movement towards the global convergence of standards. The IFRS Foundation has created the International Sustainability Standards Board, ISSB as the acronym goes, which consolidates several reporting frameworks, like the Climate Disclosure Standards Board and the Value Reporting Foundation, which also encompasses SASB, which many of your listeners may be familiar with. All these will be consolidated. The intent is to put sustainability standards in line with that of financial reporting and accounting. It’s really about promoting transparency and consistency in sustainability disclosures in order to better inform decision making investors and other users of financial reporting. Help is on the way for companies looking to streamline their ESG reporting.

Taylor Martin
[13:22] That’s great. When do you think some of these new steps are going to come into play?

Sara Zellner
[13:26] I believe the ISSB is currently working to consolidate all of their standards. Hopefully, in the next year, in 2023, or two, they’ll have those out for companies use.

Taylor Martin
[13:41] What are some other trends in ESG that businesses should be aware of?

Sara Zellner
[13:45] Yeah, in addition to the ISSB standards, the Securities and Exchange Commission, the SEC, proposed rules earlier this year surrounding ESG that could provide even more standardization and reporting. First, the SEC has proposed new climate related disclosure requirements for publicly traded companies. This past March, the SEC proposed rules that would require publicly traded companies to provide certain climate related financial data and greenhouse gas emissions information in public disclosure filings, like the 10K report, proxy statements, and others. Now, companies would have to disclose emissions that they are directly responsible for as well as the emissions from their supply chain and products. That’s one rule. Then the other, in May, the SEC proposed that ESG focused funds and firms disclose more specifics around their ESG strategies in materials like funds [inaudible] and annual reports to prevent greenwashing. Now, for those of you who don’t know what greenwashing is, greenwashing is when a company makes false claims around the ESG characteristics of a product, a service, its operations, or ESG reporting. The SEC is soliciting comments on those rules, but companies could expect to see changes as early as next year.

Taylor Martin
[15:07] That’s fantastic. I’m so happy to hear that. I was having this conversation with somebody a few days ago about with ESG you have to realize where the large volume, the heavy lift, if you will, that we’ve been doing with ESG and the reporting and people talk about how it’s not perfect. It’s like, no, it’s not perfect, but we’re working at it. We’re working. We’re trying to make it better and better and better. Hearing this just underscores that sediment.

Sara Zellner
[15:34] Yeah, it is a really interesting development and perhaps unsurprising given the popularity of ESG now that the SEC would get involved. The Federal Trade Commission is already involved in greenwashing and prosecuting greenwashing for those companies that violate those standards, which is also very interesting to see. One other trend I did want to talk about that I think is really relevant for your listeners is there’s an increasing focus on ESG impact in supply chains. Supply chains are particularly important in environmental reporting for ESG given that up to 90% of an organization’s environmental impact lies in the value chain. It’s either upstream in the supply chain or downstream in the product use phase, which is just an incredible amount. Plus, there are a lot of social and governance factors within supply chains that will move into the spotlight. These statistics, this data from the supply chain feeds into the overall data that your publicly traded companies provide then in their ESG reporting. The supply chain plays an integral role in ESG that can’t be denied.

Taylor Martin
[16:54] Yeah, I always think about a lot of the larger corporations in the United States that are doing business in China. They have been, even in fashion or technology, they’ve been moving and moving further away from doing things like that and trying to clean up their supply chain. I look at that as progress. That is good. That is progress. I have to ask you, from your perspective, because you sit in this wonderful chair understanding the ESG world so much better than I do. I have to ask. If you could wish for three things you’d like to see happen in the ESG space, what would they be?

Sara Zellner
[17:27] First off, I’d like to see more action on companies’ net zero pledges. According to the Science Based Targets Initiative, an organization that promotes best practices in reducing greenhouse gas emissions, over 1,000 companies globally have set targets to limit any rise in global warming to a maximum of 1.5 degrees Celsius, which is the temperature after which climate change may be irreversible. To help achieve this, more than half of these companies have committed to reach net zero emissions across their value chain no later than 2050. Now, net zero means achieving a balance between greenhouse gases put into the atmosphere and those taken out. Unfortunately, those long-term commitments need to be put into action immediately. I mean, according to the UN Environmental Program, the greenhouse gas emissions need to be halved over the next eight years to stand any chance of meeting the goal of 1.5 degree Celsius by midcentury. Therefore, there’s a true urgency for companies to accelerate these net zero endeavors. That’s Number 1.

Number 2 is increasing the emphasis on the social aspects in the ESG. Since the death of George Floyd in 2020, there’s been an emergence of diversity, equity, and inclusion as a critical part of almost every company’s ESG strategy, which is good to see. Companies realize that they had to pay more serious attention to the matters of DEI with their employees, customers, and communities. In addition, not only is DEI important for the S in ESG, but the pandemic has also put an emphasis on employee wellbeing and health and safety that extends through the supply chain. This is also, I feel, a really critical element that companies need to continue to emphasize in their ESG endeavors.

Then Number 3 is really embracing a circular economy. It would just be wonderful for more companies to really make that their business model. Now, for those of you who don’t know what a circular economy is, it’s a production and economic model whereby companies reuse and recycle materials, water, and energy involved into the production processes with the goal to find other uses for production waste and byproducts. Now, an example of circularity would be, say, many paper mills accept paper cups and milk cartons and juice cartons in the recycled materials that they use to create new products. Now, there are companies that manufacture sustainably produced and premium recycled fiber and paper. These recycled cups then are used to make recycled pulp that can then be incorporated into new paper cups. Companies like Starbucks have been using these types of cups made from recycled materials to demonstrate how this circular process can actually take place. It’s really fantastic to see and just would be wonderful to see other companies, especially those in the manufacturing and industry, industrial industries to see them adopt these types of practices.

Taylor Martin
[20:53] I tell you what. If I come across a genie in a bottle, I’m going to come to you first because I love that. I think those three things are wonderful. The last one, though, the circular economy, that is something that is a construct. It’s a framework. I think if not just executive team gets on board with that but everybody has to be on board with that. Everybody has to be in that mindset of that circular economy because there’s decisions made at every level of the company. If you bake that into your DNA or your mission statement, your purpose statement, your values, I mean, dig that into your company and make it part of your company, then I think even the changes to be more circular will be more effortless because everybody is on board with it.

Sara Zellner
[21:33] Yeah, you are absolutely correct that the circular economy must be incorporated into all aspects of a company. I mean, it’s not an easy model to undertake. Certainly, thinking through how you’re going to take back and reuse byproducts that you’ve created, it’s not an easy process, but the rewards are just so beneficial that it’s definitely worth pursuing, particularly for manufacturers and other types of similar industries.

Taylor Martin
[22:03] I want to put this full circle here. Your company, Lynz Consulting, tell us a little bit more about that and your services.

Sara Zellner
[22:11] What Lynz Consuting offers is a mix of strategy and consulting in regards to ESG and CSR for companies. Strategy is one of our main focal points. We also offer research and whitepaper development. Oftentimes companies want to highlight the work that they’re doing in ESG and CSR so we assist in those regards. Then finally, we work on communications and marketing. Certainly, brochures and other materials, web development or content for web materials for ESG is something else that we do. Those are our three main services that we provide.

Taylor Martin
[22:57] I love that last part about the integrating into company’s marketing materials, because if you don’t talk about it, no one is going to know that you’re doing it. You’ve got to put it out there, not just because people know what you’re doing but people want to know that you’re doing this. I think that is fantastic. Any time any company is doing that, I’m always happy to hear that. That’s awesome.

Sara Zellner
[23:19] Yeah, it is good to see. I did want to emphasize, too, that we also focus certainly on ESG reporting. The development of those reports, I mean, that’s part of the communications that we provide so that it is important to highlight for businesses to basically amplify what they’re doing in ESG so that their investors and other stakeholders know exactly where they stand in ESG.

Taylor Martin
[23:51] Okay, we’re going to have this conversation again in about a year or so because I know there’s so many things that are going to be changing probably in 2023. I can’t wait for those changes to be in effect and how that’s going to affect businesses, and hopefully, better for the planet. How can our listeners reach out to you or follow you on any social?

Sara Zellner
[24:09] Yeah, they can visit my website, which is lynzconsulting.com. I also am on LinkedIn so your listeners can connect with me there. Finally, they can follow me on Twitter @saz_lynz.

Taylor Martin
[24:26] Excellent, thank you so much for leveling us up in this area and finally talking and defining ESG so eloquently. Thank you, Sara.

Sara Zellner
[24:35] Yes, thank you so much for having me.

Taylor Martin
[24:37] Over and out, everybody. 

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Female Voice Over 
[24:38] Thanks for tuning into the Triple Bottom Line. Your host, Taylor Martin, is founder and Chief Creative of Design Positive, a strategic branding and accessibility agency. Interested in being interviewed on our podcast? Then visit designpositive.co and fill out our contact form. If you enjoyed today’s podcast, we would appreciate a review on Apple podcasts or whatever provider you are logging in from. This podcast is prepared by Design Positive and is not associated with any other entity. We look forward to having you back for another installment of the Triple Bottom Line.

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