Industry Experts Speak on the Past, Present, and Future of Environmental and Social Responsibility

Written by Iman Attari and Jing Wang

What motivates businesses to initiate their Environmental, Social, and Governance (ESG) movements? What are current practices? What can we learn by considering the past, present, and future of ESG? Four industry leaders, Kelly Alonzo, James Greffet, Tim Gawne, and Mark Lemon, answer these questions through the lenses of food and beverage, energy, accounting disclosure, and pharmaceuticals. Their conversation provides insights into the inherent motivations for the ESG movement and analyzes challenges in the process from different perspectives.

 

The food and beverage industry is one of the first sectors to readily adopt ESG frameworks. As Kelly Alonzo explains, that initiation is driven by consumers’ desires to know the production process and their concerns about its environmental impact. The food and beverage industry is a major contributor to global emissions, and it is also one of the least digitalized industries. Rather than framing this sector as the villain, we might recognize the unique possibility for improvement and advancement. The success or failure of the food and beverage industry lies in its ability to cooperate and invest in digital technology in an intelligent way that is geared not only toward making money, but creating value for the entire value chain. To that end, the FDA has begun efforts to improve traceability in the supply chain. Traceability is a useful tool for making some of the more invisible attributes of the supply chain visible. While this tool has been effective in improving other industries, its implementation within the food and beverage sector has its own unique challenges that companies will have to overcome. Additionally, we must look to more sustainable agricultural practices, such as soil sequestration and regenerative agriculture programs. The issues surrounding sustainability are complex and multi-faceted, so the solutions will need to be too.

Across industries, young people are responsible for shaping much of the movement toward sustainability. Academic programs in petroleum engineering have lost their popularity, and young people are steering clear of oil jobs. To be competitive in the arena of talent acquisition, industries like energy have to focus on ESG metrics and their efforts toward sustainability, says Tim Gawne. While energy companies may have difficulty recruiting young people, the industry, like that of food and beverage, has a lot of opportunity for change and growth. For its first hundred years, the energy business had been working to get product from the ground to consumers as efficiently as possible—primarily through the use of pipelines. As we endeavor to displace fossil fuels as our main source of energy, new challenges arise. The fossil fuels are primarily displaced with agricultural products, which are transported largely by rail. With the inclusion of alternatives comes a more complex supply chain. Energy companies, in partnership with other companies, are on the frontline to address logistic challenges incurred by displacing fossil fuels. From an investment perspective, the investor roles have been transferred to private equities, and they are attracted to ESG projects where the multiple is much higher than basic oil and gas production. A company that has ESG business can acquire funding at a lower rate than one that doesn’t, regardless of financial performance.

Mark Lemon spoke from an accounting disclosure standpoint. Companies are on the journey to integrate ESG considerations into their decision-making processes. In the process of helping companies to navigate this journey, three scopes are identified. The first is developing strategy, incorporating ESG considerations into long-term business strategy. The second is getting accurate information, which involves building frameworks to accurately capture information about emissions in all steps of the production process. The third is sharing that data, ideally on a global scale—though we are a long way from reaching that goal. One of the massive benefits of achieving scope three, is that large companies that have influence over their value chain will be able to push the companies in that value chain to be accountable for their emissions as well. From there, it will be possible to hone in on solutions like creating reduction targets and executing projects to hit those targets. In the meantime, gathering accurate information and implementing successful and accurate measurement tools is a key piece to many companies’ puzzle of more sustainable practices.

James Greffet talked about his experiences. Pharmaceutical companies must focus on long-term sustainability strategies. Eli Lilly’s long-established values–integrity, excellence, and respect for people–foster sustainable thinking.  Lilly has created a website (esg.lilly.com) that is frequently updated with information and progress about the management of sustainability goals. They have favored a stakeholder-centric view of ESG strategies instead of a scoring-centric one, where the goal is only to check as many boxes as possible to get a better report from rating agencies. They came up with two ESG topics that are very specific to a pharma company: patient safety and access and affordability of medicines. The other 11 topics are more general, such as climate, water, waste, employee well-being, diversity, equity and inclusion, community engagement, and ethics and compliance. They focus on these topics not because those are what everybody talks about, but because those are the things that matter to the stakeholders. Despite the move toward better transparency, there are still many challenges on the road to a sustainable future. The lack of standardized ESG metrics that are comparable across companies and industries is a barrier to developing a comprehensive plan of action. Even still, the turn toward ESG measurements is a step in the right direction as all industries move toward sustainability.

 

Iman Attari and Jing Wang are doctoral students at the Kelley School of Business.