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Creating value with purpose

The Carbon Almanac

Purpose

Purpose drives companies to leadership

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Purpose-driven companies have a North Star that guides them

That North Star shines bright even in these fluid, turbulent times

In tough times, “analysis paralysis” too often hijacks decision-making. We want more information. We want more data. We want more direction from political leaders. We want more clarity about what our customers need.

Companies that are purpose-driven find ways beyond the paralysis.

For example, Pernod Ricard’s raison d’être is “Convivialité” and to encourage people “to go out in search of friends old and new to create a better world.” While enacting this purpose seems daunting during social distancing, Pernod Ricard swiftly found a way to bring it to life and direct the company in a significant shift of resources.

The company is providing pure alcohol to produce hand sanitizer in France. Its subsidiaries around the world are supporting local efforts to produce hand sanitizer too.

Pernod Ricard enables conviviality with alcohol, in a new way, with hand sanitizer.

 

In the past few days, we’ve seen stellar examples of purpose-driven companies exercising leadership.

  • Comcast is offering low-income families free internet services in the US area because children need it for home schooling.
  • U Haul is offering to 30 days of free storage for students’ belongings, if they’ve lost their student housing and don’t have a place to store their stuff in the US and Canada. The CEO simply calls it “an offer of goodwill.”
  • LVMH converted 3 of manufacturing facilities that normally make fragrances for its Christian Dior, Givenchy and Guerlain brands; now they make hand sanitizer instead. LVMH expects to make 12 tons of the hydroalcoholic gel in the first week.
  • On a smaller scale, Prairie Grass Restaurant in Chicago offers daily free phone consultations with chef Sarah Stenger to answer questions on home cooking and food prep. The restaurant also put customers in direct line with their suppliers, so that as demand from the restaurant declines, suppliers will pick up a few direct customers.

I’m not privy to how these companies arrived at their decisions. We do know these decisions were taken and acted upon swiftly. That requires strong leaders who know their North Star.

In this very rough and tumble time, a few cases may not make a significant trend. But they certainly are bright spots.

As we know from behavior change experts Chip Heath and Dan Heath, bright spots not only catch our attention. They show us the way forward.

 

Meaningful purpose, strategic sustainability and material ESG

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What it takes to create shareholder value and employee engagement

Employees fist-bump
A meaningful purpose rings true to employees.

This is the first in a series of blogs that explores the value of meaningful purpose, strategic sustainability and material Environment, Social and Governance (ESG) management.

Over the past 25 years I have witnessed companies embrace purpose, sustainability and ESG to create value for shareholders and employees. 

However, it takes more than a cursory effort for a company to outperform. Purpose must be meaningful to gain employee buy-in. Sustainability must be strategic and ESG material. 

Recent research confirms companies with these qualities tend to outperform industry peers. 

A company’s purpose must become its animating force. Purpose needs to drives action and unlocks potential.  A marketing slogan or tagline doesn’t cut it. Purpose speaks to the heart of how a company serves society. It must ring true with employees. 

For example, Virgin Management Limited’s purpose is “Changing business for good.” Over 90% of all employees agree that the company is aligned with its purpose, and as a result the company enjoys very high employee engagement.

Sustainability needs to be strategic. Companies that prioritize action based on robust materiality analysis focus on what’s important – not just on what’s easy. 

For example, a clothing company may decide to change its fleet to electric cars. However, it’s not a strategic move if there are only a few cars in the fleet. It doesn’t impact business operations. Worst, it could misdirect overall sustainability efforts and squander executive goodwill.

A more strategic and impactful approach would be to increase the sustainability of its supply chain. The global clothing supply chain involves millions of people as well as tons of water, chemicals, crops, and oil. It’s a top priority action area of the apparel industry.

In a seminal paper, Professor George Serafeim explored the financial performance of companies with good ratings on industry‐strategic sustainability issues. He found that they deliver significant financial outperformance over firms with poor ratings on the same issues. 

The research also found that firms with good ratings on immaterial sustainability issues do not outperform firms with poor ratings on the same issues.

ESG needs to be material. ESG is shorthand for a company’s performance on sustainability (environment and society) and governance issues. Thus, similarly to  sustainability, a strong performance on material ESG creates value for shareholders. 

The difference between material and immaterial ESG was recently examined for the banking sector. A study released in December 2019 by the Global Alliance of Banking on Values found that banks that consistently scored high on material ESG issues delivered higher risk‐adjusted returns compared to banks that performed poorly on the same issues.

The study also shows that performing well on immaterial ESG issues neither harms nor helps performance.  These results suggest that a focus on material sustainability and ESG issues is likely to coincide with enhanced financial returns. The findings are important for banks to set operational priorities.

Where would you rather invest your money?

Graph of stock returns 2007-2019 showing 2.6% outperformance since 2014 for stocks of banks which outperform on material ESG
The top materiality portfolio outperforms the bottom materiality portfolio by 2.65% in average risk‐adjusted returns since 2014.

What’s material? The concept of materiality frames which are the relevant and strategic ESG issues for a given industry.

For example, water is material for extractives, apparel and hospitality. Water is not material for financial services. A robust materiality analysis will determine which issues are important to address and why.

In subsequent blogs, we’ll further explore meaningful purpose, strategic sustainability and material ESG, including insights into materiality analysis and other tools.