The growing acceptance of environmental, social and governance practices, or ESG, in corporate boardrooms is happening sooner than many companies expected. And with the possibility that Democrats will gain control of the executive and legislative branches of government after the November elections, this trend may only accelerate.
For middle market companies, ESG’s growing importance highlights the need to incorporate those practices into their business strategy.
Already, senior executives of middle market businesses are keenly aware of the imperative. According to a survey taken last year that was part of the proprietary RSM US Middle Market Business Index, roughly 90% of middle market business leaders said they believe ESG is important, an overwhelming percentage that has almost certainly gained traction since then, given the social unrest and prominent natural disasters of recent months.
And this focus on ESG is not limited to middle market business leaders. The Business Roundtable recently announced a series of initiatives "to advance racial equity and justice." These initiatives include examining hiring practices, reviewing compensation and increasing transparency regarding the racial makeup of their leadership and workforce. Doug McMillon, Walmart’s chief executive and the group’s chairman, said in an interview on CNBC that it was important for companies to “keep a spotlight on racial equity.”
The initiatives followed an announcement by the group in September calling for “a well-designed market-based mechanism and other supporting policies” to address climate change.
The impact of such measures alongside a change in government leadership could be far-reaching. The Democratic presidential candidate, Joe Biden, has listed climate change as one of the greatest threats to national security. He has released a plan that pushes for emissions reductions, infrastructure investment, new green jobs and advanced social justices. The plan aims to address a fundamental conundrum – that global consumption has grown while resources remain finite, or at least only partially renewable.
Biden’s plan promises a $1.7 trillion investment in clean energy and infrastructure over the next 10 years, all with the goal of achieving net-zero emissions no later than 2050. The plan also proposes rebates for zero-emission vehicles, among other ideas, and it is possible that tax policy reform could follow. The plan includes certain provisions that could double this investment through the private sector as well as state and local governments. Its enforcement strategy includes achieving certain reduction milestones as soon as 2025. At the same time, the Biden campaign says, the plan will create 10 million jobs.
All of this has the potential to affect middle market businesses, which will need to shift strategically and reinvent products, services and operations while also building innovative partnerships to improve business results. Companies that can quantify the impact of environmentally friendly business practices will have an advantage when they identify their key performance indicators.
It also affects the composition of companies’ workforces. Middle market organizations will need to acquire talent to execute their ESG strategy. Workers who are the most educated on environmental issues, possess data skills and can quantify impact will be the most valuable.
Careful consideration for changing consumer behaviors, evolving legislation and technological advancements will be important for setting strategy after the November election.
While the outcome of the election is not yet clear, what is certain is that large businesses are getting behind ESG and the middle market will ultimately follow suit. The composition of the White House and Senate will determine how quickly this shift occurs.