How Can ESG Improve Corporate Reputation?

Understanding How Can ESG Improve Corporate Reputation?

For many years it’s been about the reputation of the product, the price, and the customer service, but now there’s a new aspect to reputation – how a company treats the planet, the people, and its governance. The importance of ESG in boosting corporate reputation is now a fundamental part of the skills set of not only specialists in environmental compliance, but also of professionals in communications, sustainability and investor relations, and HR. Organizations that implement environmental, social and governance (ESG) values in their everyday operations have greater and more lasting investor, employee and customer trust as compared to those that consider ESG to be a marketing initiative, and that trust can be the most significant when it is needed most, like during a period of public attention or crisis. This article provides a practical introduction to the corporate reputation landscape of ESG initiatives, the strategies that typically work and the potential challenges even the most well-intentioned companies can fall into, which is a rapidly expanding space that impacts a company’s every department from procurement to human resources to investor relations. 

What Does It Mean When We Say ESG Improves Corporate Reputation?

First, and foremost, it’s about trust when it comes to how ESG contributes to corporate reputation. Environmental, social and governmental performance provides a series of tangible signals to stakeholders as to whether a business is acting in line with its values. When the company produces a bold sustainability statement, and then gets its materials from suppliers that have poor labor practices, it creates a mixed message that has become easier to detect to stakeholders, with greater media attention, activist investors and social media. On the other hand, a firm that has a history of minimizing its environmental impact, providing fair wages for employees, and establishing open management procedures has a wellspring of goodwill that can help absorb the effects of any crisis, product recall or rough quarter. When it comes to reputation, it’s not one decision or disclosure, but thousands of decisions and disclosures over time. It’s also asymmetric, as a positive reputation can be earned over time, decision by decision, but can be lost in days if there’s a misstep that lets everyone know that actions are not aligned with promises – many companies are now managing environmental, social and governance issues as a risk management strategy, rather than a communications one. Consider ESG performance as a credit score for trustworthiness: it is developed over a long period of consistent behavior, is examined by external parties when a significant decision is to be made (such as an investment or a partnership), and a single major misstep has a significant negative impact on the score, even if the prior track record was excellent.

Today, the relationship between ESG performance and reputation is very real—it is evident in investment decision making, in the evaluation of employers for hiring, and in the purchasing of competing brands. Poor governance and/or an under-performing environmental record can impact a company’s cost of capital, as well as its public image, given the increasing importance of ESG ratings in investment decisions made by institutional investors. What is often brought up by employees and younger generations entering the workforce is a company’s social and environmental commitments; in turn, this puts pressure on employer branding and talent retention. Consumers are also increasingly checking out a brand’s environmental and labor policies before buying, especially for a more expensive product (where they might not have to deal with many switching costs or comparable products). The first step for ESG reputation management practitioners is to understand that ESG performance is not a communications program that can simply be added to an organization’s current activities, it must be a program that becomes part of operational business decisions if it is going to be credible and communicate value to the outside world. This distinction is what makes companies that have a reputation that can be enhanced over time, different from companies that suffer a dramatic hit as a result of a gap between their truth and a message, which may come from an investigative journalism piece, a whistle blower or a disgruntled former employee. For those who are new to the job, the reality is simple: It is essential to know what the operations team is doing, what the supply chain team is doing, and what the HR team is doing, before writing a press release or sustainability report, because for good ESG communication, it depends on what’s going on behind the scenes. 

Which ESG Reputation Management Strategies Work Best?

Reputation management strategies for ESG tend to be somewhat common, including being specific and not general, making use of third party data or audits, and communicating the strategy regularly, not just in the event of a crisis or annual report cycle. The general lack of specific targets for sustainability or diversity is now being called into question by journalists, analysts and consumer watchdog organisations, who are increasingly able to see through the rhetoric to the reality. But part of this increasing scrutiny comes with the fact that data has become more widely available: satellite imagery can prove deforestation claims, public data indicates workplace safety, and financial disclosures can attest to whether claims of sustainability investments are reflected in a company’s capital expenditure. It’s more credible when companies have specific, quantifiable goals that are set for a specific date, like a stated percentage reduction in carbon emissions by a certain year. This is because a governance commitment to board diversity is more powerful when it includes a timeline and current baseline information than if it’s stated in general terms like: “We value our people. There’s also a timing element to this: anything that comes in response to criticism is likely to be interpreted as defensive, whereas anything that is introduced before there’s any controversy, will more likely be seen as leadership.

The table below provides an overview of how each of the ESG pillars tends to relate to a particular reputation building activity and the stakeholder group that is most impacted by the activity, which can be helpful when deciding where to spend limited time and budget. It helps people who are new to this area to draw a picture of their own company’s actual activities and then compare them with this framework to see which area they are least communicating about. 

Table 1: ESG Reputation Management Strategies by Pillar

What Are Five Key Steps to Build Corporate Reputation Through ESG Initiatives?

ESG professionals don’t just have to jump into whatever ESG story is in the news this month; there’s a systematic way to enhance a company’s reputation. The 5 below steps illustrate a process many sustainability and communications teams undergo to transition from good intentions to a coordinated programme which is verifiable by stakeholders.

First, do a materiality assessment to determine the most important environmental, social and governance concerns for your industry and your stakeholders; these will be different for a manufacturing company and a financial services company. Second, establish measurable goals that have a time limit, rather than a wish list, since specific numbers enable investors, employees, and customers to put the company under scrutiny and to measure progress over time. Third, integrate ESG principles into the day-to-day operations of the business, including procurement, product design, and human resources, instead of having them in a dedicated sustainability team that has little impact on day-to-day operations. Fourth, make sure to invest in credible and third party verification of ESG claims, preferably through external auditing, through a broadly accepted certification programme or through an independent ratings agency, because claims made without third party support are increasingly not enough to meet sceptical stakeholders. Fifth, report progress regularly, not just in an annual glossy sustainability report, but through regular updates to make sure you let people know the company is making progress—and making adjustments to course-correct when it slips up, as a clear story of success is more believable than a flawless one. It should be noted that this is a sequencing issue: jumping straight from the materiality assessment to public commitments can be one of the most common pitfalls that can occur in an early-stage ESG initiative, as targets can appear impressive on paper but don’t address what the stakeholder group cares the most about. On their own, each of these five steps is a good idea, but when they are combined, the five-part strategy becomes a program that stakeholders can easily check to ensure that it’s truly aiding their companies’ reputations.These five steps, taken as a whole, make ESG more of a program than a series of good ideas and generate reputational gains that stakeholders can verify independently—the difference between real and simply good press. This sequence is often transferable to other job functions, as it is good practice in sustainability, diversity and inclusion and corporate governance overall. 

What Real-World Examples Show About How ESG Improves Corporate Reputation?

Let’s take, for example, a medium sized consumer goods firm that was being criticized for excessive plastic packaging waste. Instead of making a public statement in defence, the company released a package reduction roadmap over several years with clear annual targets, worked with an independent environmental NGO to validate the progress it makes and took an honest look at its own results, including those years when it didn’t achieve its targets. This approach involved coordination within the company between procurement, product design and the marketing function groups that had not previously worked so closely together; and it took time to have the goals of the roadmap integrated into the contracts and products of suppliers, and not just as a public announcement. This regularity evolved into a focus from critical reviews to mostly positive ones over the years, and the company was recently quoted as a good case in point in industry publications of how ESG can enhance corporate reputation when commitments are backed by clear accountability, not a single statement of intent. The key factor that persuaded some skeptical journalists that the roadmap was not a PR stunt but a promise to operate the company was the openness with which the company acknowledged that it was not making predictions when it reached 100%, 200%, or even 300% completion.Analysts pointed out that when the company was not predicting that it had hit 100%, 200%, or even 300% completion, it was being open that it was missing its targets, which convinced skeptical journalists that the roadmap was not a public relations stunt. The upshot for professionals is that it’s easy to make a lofty commitment, but hard to achieve without a way to measure and report on progress toward it. What is important is that the targets are not only disclosed but after the disclosure an explanation is provided as to what the company did to change as a result of the disclosure, and this is what makes the commitment more than a one-off PR stunt to defuse criticism from stakeholders.

A contrasting case is one of a global apparel company which was embroiled in a labour rights issue due to the poor working conditions of a subcontracted factory which were exposed through investigative journalism. The company’s initial response was largely focused on public relations messaging rather than actually addressing the supply chain issue, which further hurt the company’s reputation as it continued to be discussed on several news cycles, and was subjected to further questioning from labor rights groups and socially conscious investors regarding the company’s overall supply chain oversight practices. Public opinion started to improve after the company got an independent supply chain audit report, shared it with the public, and instituted specific corrective measures, along with deadlines. In this case, the lesson to be learned from ESG reputation management strategies is that simply telling the world you’re dealing with a governance or social problem without fixing the underlying issues of your operations only extends the damage. Those who are tasked with communications during a crisis need to be aware that today’s stakeholders have much more access to independent information than, say, 10 years ago, and thus a discrepancy between what a company says and what is actually true is likely to be exposed sooner or later, regardless of how much effort is put into creating the initial message. The company’s own communications team has now admitted that it could have resolved the situation much more quickly if it had recognised the issue that much quicker, and committed to an immediate audit. 

What Are the Benefits and Challenges of ESG Reputation Management Strategies?

Effective ESG reputation management actions bring more advantages than just reputation. A company’s ability to access capital is also easier due to the fact that many institutional investors now include ESG risk as a screening question when deciding to invest and lenders have become more inclined to provide more favorable terms for companies which they perceive to have credible ESG performance, frequently through the use of ‘sustainability-linked’ loans where the interest rate is directly linked to the company’s ESG performance targets. Talent acquisition and retention is also enhanced, with many people conducting research on a company’s environmental and social impact before accepting a job offer, especially among early career professionals where values are more strongly linked to overall job satisfaction. Especially in sectors where there are multiple similar product offerings, customer loyalty can also be reinforced by using ESG performance as a tiebreaker in the spending decision. Relationships with suppliers and partners can also improve: the growing push for increased ESG reporting from companies by their large corporate buyers can create opportunities that could otherwise be denied, if companies have a strong ESG reputation. Reputation around ESG credentials can impact revenue opportunities beyond consumers as there are more and more public sector contracts and partnerships that incorporate ESG into their vendor selection process.

The challenges are as real. ESG performance is still challenging to measure and report consistently, as standards and disclosure frameworks are constantly evolving and differ by region, making it difficult for companies to confidently compare their performance against other companies and many mid level professionals having to translate between multiple, overlapping reporting frameworks to meet the needs of various investors and regulators. However, there is always a risk of greenwashing accusations, meaning even when the intent is good, ESG communications, if not supported by verified data, can be perceived as being too big or too small, hurting the reputation more severely than too little. Resource constraints is another challenge, especially for smaller or mid-sized businesses that may not have a sustainability team and where ESG investments need to be considered in the context of other business activities. Those who work in this area have to understand that achieving a positive reputation for ESG over the years through these activities is a slow process but having a poor approach to ESG issues can result in reputational damage that can happen in seconds. Additionally, a few years ago companies may have thought their efforts to report on ESG were adequate – but today, due to new regulatory requirements in several regions, such efforts may not be enough for the expectations of stakeholders and regulators, and companies will need to continuously adapt their approach to ESG reporting, not treating any single report as a final product. From a practitioner’s perspective, this constant evolution shouldn’t be seen as a problem, but rather a chance to get ahead of reporting requirements and tailor ESG processes to be more flexible and documented, as the reporting requirements continue to grow tighter over the coming years. 

Conclusion

The bottom line of how ESG benefits a company’s reputation is being consistent, not only in what they say, but in what they do, and backed up by credible data, not marketing jargon. The practical lesson here: Communications, investor relations, and building a career in sustainability should be viewed as a long-term approach to corporate reputation management instead of a communications campaign, supported by clear metrics, third-party certification, and transparent reporting, even if results aren’t as good as expected. There will be many small steps of transparent disclosure that combine to create strong ESG reputation management strategies, and those who are in tune with the difference between what they’re saying and what they’re doing will be much more capable of navigating in a world where stakeholders are watching more than ever. The bottom line is that consistency, verification, and honesty will always be the best approach – whether you are preparing your first sustainability report, preparing for an interview at a company with a reputation for ESG initiatives, or advising board or senior leadership on reputational risk.