Guest speaker: Dan Esty, Professor of Environmental Law & Policy at Yale University; Founding Partner at Constellation Research and Technology, Inc.; and best-selling sustainable business author
A New Look at Sustainability: Achievements, Solutions and Major Shifts
Episode 4 | Duration: 16 minutes
What is the key to a sustainable future? When will the world see a unified approach to sustainability? Does being sustainable correlate with financial results? In this episode, we discuss the changing attitude towards responsible business behavior, the role of incentives and regulations in ESG, and the increasing involvement of various stakeholders -- from suppliers to employees. Join us as we explore the above with Dan Esty, Professor of Environmental Law & Policy at Yale and author & editor of 12 books dedicated to sustainability, including the prizewinning “Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage” and the recent volume “The Labyrinth of Sustainability: Green Business Lessons from Latin American Corporate Leaders”.
Keesa Schreane: Welcome to the definitive Sustainability Perspectives podcast, where we share examples of leadership and innovation, small entrepreneurial businesses, large megacorporations and all types of enterprises in between are seeing a global shift in perspectives around the role of business and society, from ESG investing to sustainable finance to social impact in our communities. We're on a journey to leverage data and intelligence to make the best business decisions possible. Enjoy the podcast.
Today's guest is really one of the icons when it comes to environmental strategy and academia and policy. I have with us Dan Esty. Dan is Hillhouse Professor of Environmental Law and Policy at Yale School of Forestry and Environmental Studies and Yale Law School. He served in numerous policy capacities, including the U.S. Environmental Protection Agency and is author and editor of 12 books, including “A Better Planet” and the classic “Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value and Build Competitive Advantage.” I have my worn and torn copy right here.
Dan, thank you so much for joining us. You started with the EPA in 1989, wrote Green to Gold in 2006. You've been in this industry for a while. You've seen lots of changes and just want to go through some of those positive changes that we've seen. The Global Sustainable Investment Alliance reports that $6.5 trillion of U.S. assets under management are invested in sustainable, responsible or impact investment strategies. That's an increase of 76 percent since 2012.
Also, we've seen a rise in sustainability in the fixed income space with the rise in green bonds. We've seen the Paris Climate Agreement of 2015, the U.N. SDGs, and we're really excited because things are looking really good. But we know that we live in an ever changing political environment, an ever changing business environment. So with that being said, Dan, do we need to think about changing our strategy, our approach in terms of keeping sustainability top of mind in the business community?
Dan Esty: So let's celebrate what has been done. And the truth is, as you've suggested, the world has changed a lot from 20 or 30 years ago, including the business world's attitude towards the environment and energy and sustainability.
Now, when I first got into this business, there were a lot of companies that didn't think this was on their agenda, didn't think the environment mattered. And as a result, there was a lot of mistakes made, a lot of pollution put out into the atmosphere. But I think we have seen almost everyone in the business world come to understand that environment is part of their day to day business practice. It's got to be part of their strategy. So I think that is something to celebrate.
And the fact you have so many companies and so many investors committing to these principles for responsible investing, the numbers you cited shows the investor world has also come to this agenda. But we still have a long way to go. And some of those commitments are rather thin, not deep enough. And we also face some pretty significant challenges. We are seeing, for example, that the efforts to advance on climate change are not moving fast enough. We're getting ever more scientific evidence that tells us we have a real problem and one that's going to require ramped up effort. So I think it's a story of both good news and bad news.
Schreane: So in terms of how we need to think about moving forward, we, as you said, made lots of progress. But how do we need to think about changing what we do? How do we think we need to think about reassessing our commitment and reassessing how we approach this?
Esty: I think you need to think as a business person about how the community and the society around you is changing and what the expectations for business are going to be going forward. And just to give you one example, a critical example, though, in the last few months we've seen the Business Roundtable shift gears in a major way, in its definition of what the mission of a company should be. For the longest time, a lot of business leaders, including the Business Roundtable, would have said that the key to a business is delivering shareholder value.
Milton Friedman had defined the space for, you know, 75 years, 80 years. And now what we understand is that the world is going to be very different and we're going to have to have companies thinking about, of course, shareholders, this doesn't go away. But really a broader set of stakeholders, their employees, their customers, their suppliers, their communities all need to be in the equation. And I think that requires a bit more effort. And it's going to, in the long term, be better for society.
Schreane: The Business Roundtable, obviously has some heavy hitters. You have the head of JP Morgan there commenting about that, head of Johnson and Johnson commenting about that.
But if we also look at smaller or mid-sized companies, the ones who are looking to be suppliers, right, the ones who are looking to be vendors, not necessarily bit players. What's their incentive to align with some of these sustainability goals?
Esty: Their incentive is to really become a player in those big businesses that they might be selling to. It's often the case that supplier codes of conduct are now in place. If you want to sell to Wal-Mart, for example, you have to sign up to a whole set of obligations. If you don't do it and you're audited, you'll be tossed out of that supply chain. So I think a lot of small and middle sized enterprises are recognizing that expectations are rising for them as well.
Schreane: When we think about what the expectations are, we think about how do we define ESG? How do we define sustainability? How do we all get on the same page? And it's a bit challenging if you look in the finance where we have FASB. So we have a set of guidelines, a set of standards on this, what materiality is. But if you look at ESG and sustainability, we don't have that same sort of guidance. So how can we come to a conclusion in terms of what ESG and sustainability means across the board?
Esty: You're absolutely right. And this is a very big problem because there is a growing world of investors that would like to bring a sustainability lens to the construction of their portfolios, but they're not really sure that the data that's available, that ESG metrics, environmental, social, governance metrics are solid. They're worried that they're getting maybe, you know, greenwash and not real leadership highlighted by these particular metrics.
Schreane: And we know that Refinitiv also has a Diversity and Inclusion Index, as well as the ESG data there as well. And so it's really interesting when we look from a perspective of where we're going. The standardization that's not there. And I also just want to talk about the policy piece. So if we have businesses that are really focusing on how do we find out what sustainability is, how do we standardize? And then we have policy government. These two entities need to work together.
Esty: They really do. And you said something important earlier that the accounting world has a baseline. It has FASB. And we have an accounting standards board that tells people how to report and precisely what to report. A methodological standard as well as sets of metrics that have to be followed through on. We need something similar in the arena of sustainability so that we get everybody on the same page and there can be real comparability across companies. So we can look at an industry and know who is leading, who's lagging.
Schreane: So, Dan, one of the most important pieces of this entire equation has to do with how the public sector works with the private sector. I mean, let me know your thoughts on this. Do we need those partnerships in order for us to evolve?
Esty: The public sector is going to continue to be leading the charge on a number of issues and setting the standards, setting out the regulations. But I think companies are realizing the public has an expectation that they will also be solutions providers. And what I'm seeing in the marketplace, and this is particularly true in the environmental social governance metrics space is we see companies maturing. We see them starting to take up sustainability as a challenge. And just like they had to take up sustainability or take up other big challenges in society, including things like the quality revolution and information technology, they're beginning to understand that there are a core set of things they have to do to be players going forward and they begin by analyzing the issues, start to measure performance. Think about targets, reward their managers for hitting targets.
And then as the maturity curve moves on, they hit the high end of really beginning to see themselves as able to provide goods and services that can be in the market as advantaged because of that leadership. And I think that's where a number of companies are going. They want to be seen as contributing to the Sustainability Solutions Society needs. Whether that's a decarbonized future to address climate change or a technology that helps us get better drinking water, they're starting to see themselves as able to make a difference and not simply playing defense, but in effect, playing offense and helping society hit the goals, the sustainability goals that we all need to do.
Schreane: And so you mentioned, too, that in some instances we can reward managers who act in this way. Do you think that that's going to really be what pushes things for what we need to start rewarding and showing that we appreciate sustainable thought and sustainable approaches through monetary rewards?
Esty: I think incentives matter a lot. And I think within a company, the managers that are taking this agenda seriously and helping their leadership team deliver on sustainability promises, improved sustainability performance are going to increasingly be rewarded. It's going to be a key performance indicator of everyone in the management infrastructure. So I think that's really coming. And then I think more broadly, society wants to reward the companies that are doing well. So there's going to be a big economic incentive for companies to be seen as sustainability leaders, particularly as a growing number of investors say, I want better alignment between my values, including my commitment to a sustainable future, a planet where climate change has been addressed and my portfolio. I want to know which companies are in alignment with my agenda and which are not. And that's a huge economic incentive across the marketplace.
Schreane: So that goes back to that whole ecosystem you talked about before. So there are the shareholders, there are the CEOs, the company heads. There are the suppliers. I want to talk a bit about the employees. So if we're looking at this whole ecosystem of who creates a business, where are employees falling in terms of what they want to see happen in the sustainability space and in the ESG space?
Esty: Well, it's very clear now that companies are in a battle for talent. And the best companies understand that. And one of the reasons to do sustainability is because you're sustainability profile will be critical to your human resources management capacity. People increasingly, especially our high end knowledge workers, want to go to work every day feeling good about the company they're part of. And they're going to be looking at those sustainability commitments, looking at the sustainability strategies and saying, is this a company I feel good about? And if not, they'll walk out the door and find somebody else who's in better alignment for them.
Schreane: Let's shift a bit and talk about policy. One of the examples that you gave in your book was the automotive industry. We can't really legislate the types of cars that people drive, but we can legislate how companies are building their cars. So with that being said, where do the U.S. policy going? With other industries outside the automotive industry to really help to create some sort of boundaries? Or do you see us really focusing on policy as opposed to other areas to tap into this?
Esty: Well, I think you're going to see a number of structures to try to guide companies in the corporate world broadly toward a sustainable future. In some industries and in some places, it will be old school regulations where the government sets out standards for air emissions releases, water emissions into a nearby river or releases of greenhouse gases into the atmosphere. And increasingly, those standards are going to be tightened and that will affect industries that have not done as much as they should.
And I think we also recognize there's probably some shift coming towards economic-incentive-based regulation where not only are standards going to be set, but people are going to pay for every bit of pollution that they're putting out into the atmosphere. And that provides an ongoing and everyday incentive to try and reduce that harm and avoid those payments.
Schreane: So if we're making a case for sustainability and we're talking to CEOs or the people who could really drive change, how would we show the correlation between environmental goals and objectives and sustainability goals and objectives and financial objectives? So can we honestly make the case and say, hey, if you meet your sustainability goals, you're more than likely to meet your revenue goals, too? Can we honestly say that? What can we say about that correlation?
Esty: So going back now 20 years in my research on corporate sustainability, I've been working on this hypothesis that the sustainability leaders will also be financial outperformers. And in my original book that you mentioned, Green to Gold, I looked at the wave riders, the green companies that were out in front of the pack, ahead of the others and then looked at their performance compared to the averages in our sustainability, those leaders were well out in front in terms of financial performance of others. And I think that correlation continues to be tested and it doesn't occur and doesn't exist in every circumstance and not every measure of sustainability will reveal financial outperformance.
But I think there's a pretty strong hypothesis that the companies that are good at managing sustainability are good at managing other things as well. And that's going to lead over time to outperformance. So I'm very much focused on finding ways to gauge sustainability leadership in a serious way. I'm working beyond my Yale research with a little company called Constellation Research and Technology. And we are really finding very interesting ways to clean up the environment, social, governance data that's there, sharpen the focus and integrate across various approaches. And with that, really begin to see who the sustainability leaders are. And our analysis suggests there will be elements of this that lead to outperformance in a systematic way over time.
Schreane: And finally, Dan, what is the big idea? So what new trends, new initiatives, new green waves do you see taking place that you think might take investors by surprise, businesses by surprise, or even regions by surprise? What is the big idea coming up next?
Esty: Well, I would tell you that my own big idea and it's mentioned in this book that I'm about to release called “A Better Planet 40 Big Ideas for a Sustainable Future” is the importance of innovation to sustainability, success. And this won't be a surprise to people that have studied innovation because they know that perhaps the most significant finding and social science and management science of the 20th century was that everybody needs to innovate to stay at the top of their game. And I think what we now realize is that's going to be the key to a decarbonized energy future. It's the key to a sustainability future more broadly.
Frankly, the companies that are driving innovation around sustainability will have huge market opportunities. So I say focus on innovation. Watch that space. The companies that are really delivering not only new technologies, but new supporting technologies, not just energy efficiency or renewable power, but smart appliances, the smart grid, energy storage, a whole lot of things critical to our future economy. Those are the folks are going to be running out in front. And frankly, it's the people that engage the public on sustainability, that provide ways to market through sustainability. To think about sustainability as a way to get partnerships going with environmental community. These are the folks you need to watch. They're the ones I think you'll really see stepping up their game and outperforming their peers.
Schreane: So innovators and relationship builders. That's what I'm hearing. Dan, thank you so much. We really enjoyed having you. And thank you for the new book that I'm adding to my bookshelf now.