Investing in Society is the authoritative source to assess the corporate sector’s progress toward being increasingly purpose and stakeholder driven. CECP’s assessment combines rigorous analysis with research, trends, and cases from the ESG landscape, examined through the lens of CECP’s engagements with more than 200 of the world’s leading companies. Investing in Society organizes its insights as a company might in its own scorecard: Priorities, Performance, People, Planet, and Policies (the five “Ps” framework). Investing in Society is the must-read digest for the state of corporate purpose.
NEW THIS YEAR:
In keeping with past years’ framework, Priorities, Performance, People, Planet, and Policies (five “Ps”), this report adds a new assessment of the state of corporate purpose. CECP conducted a Factor Analysis which explores the degree to which financial and ESG metrics are correlated with each other and explains changes within five “Ps” framework.” You can download more information about CECP’s ESG Factor Analysis here.
“Investing in Society provides a quantitative and qualitative examination into the current state of corporate purpose.”Kari Niedfeldt-Thomas Managing Director, CECP See Executive Letter Here
This section refers to current corporate priorities. This year, elements of CECP’s Priorities section included corporate responses to Covid-19, recent developments in corporate purpose, and predictions about the near future in the corporate sector. While there are few widespread data points that could potentially be used for a Factor Analysis, this aspect is no less important than those included in the Factor Analysis.
The current health crisis has shown that we are not necessarily all in this together. The current pandemic has exacerbated some of the preexisting economic disparities and made even more visible previous political differences. However, the corporate sector can act as a catalyzer to help propagate empathy and listening between opposing groups.
The current pandemic has made it clear that not all sectors were ready to respond to a changing climate. The corporate sector is definitely leading the way to help bring society to a new normal by adjusting work from home policies, upgrading technology, and particularly, cutting innovation time from years to months.
Taking care of employees starts at the top of corporate leadership. CEOs’ role in providing safety for employees, especially in the current context, is more important than ever. Supply chain, essential and front-line workers were especially at risk when the Covid-19 pandemic started. Fifty-four percent of companies have had at least some changes in how they work in the areas of future of work/reskilling/upskilling of employees as a response of Covid-19 (Source: CECP Pulse Survey, August 2020).
We saw companies support voting, make statements condemning racism, and care for communities struggling with Covid-19. As companies reflect on their role in advocacy, they will find efficiencies, as they always do. They will identify their niche, their market.
According to the 2020 Edelman Trust Barometer, “social” is the most important ESG priority for investors, including a healthy corporate culture. Our collective goal is to extend the capital time frame, or as Rebecca Henderson says, "re-wire the capital markets”. We see growing evidence that corporate responsibility and investor relations (IR) are working together.
CECP’s CEO Investor Forum’s report The Return on Purpose: Before and During a Crisis, clearly illustrates why leading companies hold purpose at the core of their strategy. Financial performance between high-purpose and low-purpose brands widened during Covid-19. The purpose score gap between top- and bottom-quartile total-shareholder-return-performers increased during the pandemic. Companies with the best purpose scores generally moved up and into the top quartile of total shareholder return performance, suggesting that the capital markets expected companies with stronger corporate purpose to maintain a stronger connection to their consumers and deliver more resilient financial performance.
BlackRock CEO Larry Fink once again reinforced through his letter in 2020 to company executives the importance of embracing a strong sense of purpose and a commitment to stakeholders, which help companies connect more deeply to its customers and adjust to the changing demands of society: “Ultimately, purpose is the engine of long-term profitability”. In this sense, there is an increasing set of conceptual frameworks to guide businesses and lawmakers toward policies and practices that should help corporate “profitably solve the problems of people and planet,” and prevent companies from doing harm.
Corporate purpose statements are continuously evolving. Sixty-two percent of companies have changed their corporate purpose statement in the last five years (Source: CECP Pulse Survey, July, 2020). However, as reflected in McKinsey’s Organizational Purpose Survey, a corporate purpose gap forms when there is disconnect between public perceptions of business and its potential for good, or when there is a disconnect between employees’ desire for meaning at work versus what they experience. This corporate purpose gap is also reflected in the fact that “contributing to society” and “creating meaningful work,” the top two priorities of employees, are the focus of just 21% and 11% of purpose statements, respectively.
Covid-19 hit corporate budgets in 2020 and 2021: 47% of companies stated their community investment budget increased in 2020 due to Covid-19 response. Subsequently, 18% of companies predicted their community investment budgets would increase in 2021 (Source: CECP Pulse Survey, April-May, 2020). Corporate purpose programs rapidly adapted to Covid-19 by responding to the needs of community partners quickly through grantmaking and employee donations.
Companies maintained community investment budgets, increased engagement from employees in the form of more corporate matches, increase in virtual volunteering, and evolved thinking on issue areas of focus such as food security.
Administrative processes and corporate infrastructure also had to adjust to the new reality: only 22% of companies planned to return to in-person work in 2020, 34% had a timeline to return to work in 2021, whereas 44% were undecided (Source: CECP Pulse Survey, October, 2020). Eighty-five percent of companies reported they had unique Covid-19 response efforts, such as altering manufacturing to produce hand sanitizer, however only 54% were able to measure them (Source Pulse Survey, May 2020).
The Edelman Trust Barometer 2020 shows that customers expect brands to act: the percent of belief-driven buyers increased from 2017 to 2019. These types of buyers believe that brands can be a powerful force for change and choose brands based on their stand on societal issues.
More granularly, 90% percent of Gen Zers believe companies must act to help social and environmental issues and 75% will do research to see if a company is being honest when it takes a stand. Moreover, corporate purpose, as a force for good, has a positive effect on demand, loyalty, consumer advocacy, price premium, strategic clarity, innovation, effect of diversity, brand reputation, and growth.
CECP’s Giving in Numbers: 2020 Edition shows that companies know how important it is to measure the business value of community investments through employee and brand/customer metrics: 4 out of 10 companies did so in 2019. This is slightly up from previous year, especially for brand/customer metrics (33% in 2018). The business value of brands having a well understood “Purpose” has revealed a strong business benefit to such purposeful brands and their companies, as consumers are four to six times more likely to buy from, trust, champion, and defend companies with a strong purpose. Purposeful brands grow twice as fast as their competition. Over a period of 12 years, the brands with high perceived positive impact have a brand value growth of 175%, versus 86% for medium positive impact and 70% for low positive impact.
Performance factor: CECP’s ESG Factor Analysis showed that variables associated with financial performance and economic distribution, had a very high correlation with each other and grouped into a common underlying factor. Although financial metrics were included in the calculation of the Factor Analysis, the main analysis centered on Planet, People, and Policies.
CECP’s Stakeholder Scorecard showed that companies in the Fortune 500 ranking had very mixed financial performance when comparing fiscal year 2017 and 2019. During that timeframe, Revenue and EBITDA increased, however, Market Capitalization decreased.
The interconnection between financial performance and ESG prioritization may be more clearly evidenced in the long-term. CECP’s CEO Investor Forum’s report, ESG and the Earnings Call, sets out practical recommendations for corporates to embed ESG content into earnings call discussions. The recommendations sit in three broad categories: using the earnings call schedule; operational process approaches to develop relevant ESG content; and narratives and metrics to disclose. The paper surveys the literature on short-term concerns and the rise of ESG into the capital markets mainstream. It also connects CECP’s work on long-term disclosure to the shorter-term accountability environment offered by the quarterly call.
Prosperity is recognized by the SDGs and the World Economic Forum (WEF) as a critical area of importance. The importance of improving financial performance in the corporate sector goes in hand with having a more equitable and prosperous society. Long-term value creation is critical for business performance, competitive advantage, mitigating risk, and strengthening stakeholder relationships. Even when there is not yet a direct link between achieving the SDGs and financial performance, stakeholders have indicated that reporting on these metrics is important for sustainable value creation.
CECP’s 2020 report, Global Impact at Scale, found that the unprecedented global health crisis of the Covid-19 pandemic has made social inequalities starker, in turn increasing the urgency and relevance of the SDGs. Global companies prioritizing the use of SDGs are on the rise by more than 20% compared to the previous year.
As organizations address the longer-term implications of Covid-19, it is imperative to focus on the needs of all stakeholders--from customers to suppliers to shareholders and, specifically, employees--to ensure no one is left behind.
People factor: CECP’s ESG Factor Analysis showed 45% of companies in fiscal year 2019 had Factor Scores greater than zero for the People factor. In other words, these companies’ values showed greater weight and correlation with diversity, as opposed to companies with Factor Scores less than zero.
CECP’s Stakeholder Scorecard showed that companies in the Fortune 500 ranking had substantial improvement in social and workforce investments between 2017 and 2019. Both Giving in Numbers’ Total Community Investment and Bloomberg’s Community Spending figures have increased. Metrics on employee engagement also show positive outcomes (e.g., more volunteered hours).
Planet factor: CECP’s ESG Factor Analysis showed that 69% of companies in fiscal year 2019 had Factor Scores greater than zero for the Planet factor, or in other words, had a positive impact on the environment, as opposed to all other companies that had Factor Scores less than zero, which implies a negative impact on the environment in terms of this composite variable.
CECP’s Stakeholder Scorecard showed that companies in the Fortune 500 ranking had overall positive environmental performance between fiscal year 2017 and 2019. Positive environmental impact was reflected in a slight reduction in greenhouse gas emissions, larger amounts of recycled waste, as well as increase in the percentage of companies offering water or waste reduction policies.
The public expects companies to continue their efforts to fight climate change despite challenges from the Covid-19 pandemic. Read more here .
In 2020, more than 150 companies, including Apple, Google, IKEA, and Microsoft joined their voices to call on the EU to tighten greenhouse gas emissions restrictions. Read more here.
Sustainable debt and green bond issuance broke records in 2020, despite a temporary slowdown during the height of Covid-19. Read more here.
As investor demand for green bonds has been high, countries have responded. Germany has created a green bond framework for its first sovereign green bond, which was issued in 2020 and annually going forward. Read more here.
CECP’s Global Impact at Scale report shows how most global companies have established their organization structure so teams work together on the “S” and “E”, rather than via informal collaboration (see Global Impact at Scale, Page 22). Most companies are increasing ESG resources across the board, and a vast majority are predicting increasing resources on environmental issues, in particular. An overwhelming 85% of companies reported “E”-related resources (e.g., for carbon offsets, or water) were on the rise; compared to resources addressing social issues (68%). Globally, no company reported a decline in either “S”- or “E”-related resources. This is in line with CECP’s ESG Factor Analysis, which shows that a greater percentage of companies (69%) are improving their environmental impact compared to the percentage of companies making progress on People metrics (45%).
WEF highlighted in 2020 the importance of integrated corporate governance, or more fully integrating Environment, Social, Governance, and Data Stewardship (ESG&D) factors into the governance, strategy, and operations of companies. Integrated corporate governance takes a holistic view of shareholder and wider stakeholder interests by systematically internalizing ESG&D considerations into the firm’s strategy, resource allocation, risk management, performance evaluation, and reporting policies and processes.
Many companies are acting on the idea of integrated corporate governance. Significantly more companies (+14 pp) now have a CSR/Sustainability (or related terms) committee on their Board, as shown in CECP’s Stakeholder Scorecard.
Russel Reynolds Associates published a list of Global Trends on Governance in 2020. Some of the main trends include a greater focus from investors on the environmental and social aspects of ESG, an increased importance of corporate purpose, better board oversight of corporate culture and human capital management, an expanded concept of board diversity that includes ethnicity and race, and companies facing wider forms of investor activism.
The Shareholder Commons’ report From Shareholder to Stakeholder Capitalism provides a series of measures to change current US laws to reduce shareholder primacy and include broader interests of human shareholders and benefit governance.
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CVS: Read more about CVS Health’s evolving role in the health care marketplace to demonstrate its purpose of helping people on their path to better health. This case shows how, by putting purpose at the center of strategies, companies may increase customer loyalty and broaden their customer base, enhance employees’ engagement, and drive greater interest by shareholders. Click here to read more.
Google: Google pledged to invest money and redevelop some of its commercial-use land to address the housing crisis in the Bay Area. Google also plans to donate additional funds to nonprofits that address homelessness and displacement. Read more about Google’s initiative to redistribute to society in a self-sustaining way. Use the following links to read the relevant NY Times article and Google blog.
3M: As part of its purpose to "use science to improve lives and help solve the world’s toughest challenges,” 3M encourages employees to dedicate 15% of their time to pursue their own ideas and concepts. In the seventy years since the company began this program, it has delivered countless innovative technologies, including Post-It Brand notes. Today, 3M is considered one of the most innovative companies in the world, demonstrating how a commitment to purpose can encourage new ideas and advance transformation. Read this case study here.
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