By Pamela Grinter, partner at Fox Rothschild LLP
Food manufacturers have a great deal to gain by being proactive in addressing ESG issues in their business. Companies are increasingly being evaluated on not only their profitability but also on the manner in which they conduct business.
ESG stands for “environmental, social, and governance” and is a term that can be used interchangeably with sustainable or socially responsible. Reference to ESG means using environmental, social, and governance factors to evaluate a company or its business.
ESG originated as an investment strategy. ESG concepts are used by investors to make investment decisions, but they are also used by companies to assess their business and operations for a broader purpose. ESG criteria are a set of standards for a company’s operations that consider non-financial factors to supplement traditional financial data. Companies that address environmental, social, and governance risks may be less risky investments and may have better performance and financial results.
Environmental criteria illustrate how a company performs as a steward of nature. Social criteria examine how a company manages its relationships with its stakeholders, including employees, suppliers, customers, and the communities where the company operates. Governance standards address a company’s leadership, executive pay, financial and operational audits, internal controls, and shareholder rights.
For ESG purposes, a stakeholder is a party that has an interest in the company and can either affect or be affected by the business. Key stakeholders in the ESG analysis include employees, suppliers, customers, shareholders, and the community. Each stakeholder group encompasses its own risks and opportunities, and businesses need to be able to track and respond to them all. The risks and opportunities presented by an organization’s ESG performance vary between stakeholder groups, affecting the company’s overall ESG profile and resulting engagement of the stakeholders.
When the impacts of ESG considerations on different stakeholders are understood, companies are better placed to respond to a shifting business landscape, and in a position to continuously improve performance. In the long term, transparency in corporate governance, weight of environmental footprint, and how socially responsible an organization is all factor into how well it can service different stakeholder needs.
Stakeholders: Investors
Investors are focused on ESG factors because of investment performance and because the ESG values are important to them. Long-term financial performance is linked to ESG, and shareholders are important when weighing stakeholder priorities. ESG focused funds generally outperformed the S&P 500 in 2020. Millennial investors in particular are showing commitment to investments that reflect their values.
Stakeholders: Customers
ESG factors are driving where consumers purchase goods and services. Many consumers now expect companies that supply goods and services to be ethically aligned to their own priorities. Executive pay, treatment of employees, sustainable sourcing and environmentally conscious practices all play a part in this analysis. Consumers are willing to change their consumption habits to cut their environmental impact and believe that corporations should help improve the environment. Consumers may be willing to pay a premium for goods from an environmentally friendly brand.
Stakeholders: Employees
Employee relations have been and continue to be in the news, as the unprecedented global health crisis has forced businesses to reevaluate their workforces. ESG issues for employees include how employees are managed, communicated with, protected, supported in new working environments, or terminated. Going forward, these issues will be just as important, driving the attraction and retention of talent in a competitive marketplace. An employer with a more diverse workforce that makes a greater effort to understand employee perspectives will be more attractive to employees. Employees do not just want to be treated well, they want to work for companies that share their values. Working for a company with a strong sense of purpose results in more fulfilled employees.
Stakeholders: Suppliers
Suppliers are a critical element in the ESG analysis. This has become more obvious given COVID-19’s impact on supply chain operations for many organizations. Supply chains can be highly complex. They are also essential to the success of almost all businesses and can be a significant source of value creation and innovation. The supply chain can also expose a company to hidden and uncontrollable risks driven by ESG factors including natural resource depletion, human rights abuses, and corruption.
Stakeholders: Community
Various members of the company’s community may be relevant stakeholders. Does the company proactively promote health and economically viable communities?
Hearing from communities impacted by the company is critical to monitoring and assessing ESG risks, protecting and respecting community members’ rights, and ensuring successful and sustainable investments. An important step in this direction involves committing to ESG metrics that integrate the need for direct community feedback and effective grievance mechanisms to ascertain risks and respond to unintended impacts.
Relevant stakeholders include owners and investors, employees and service providers, customers, and suppliers. Each of these stakeholders can provide a different insight into the company’s business, its impact on ESG elements, and how the company can improve operations, productivity, and its ESG performance.
After identifying its relevant stakeholders, company management should review its operations to determine the ESG issues that are material to its business. With that information, the company can augment its strategic plan to improve on those ESG metrics.
Pamela Grinter is a partner at Fox Rothschild LLP and co-chair of the firm’s Food & Beverage and Environmental, Social & Governance Practice Groups. Her practice primarily focuses on business and tax law. Pamela can be reached at [email protected].
