For more than 35 years, Cathy has held several senior leadership positions in safety, health, environment (SHE), product stewardship, sustainability and manufacturing quality areas, at AlliedSignal, BASF and American Standard, across 47 countries and 20 industry segments. She led strategies throughout hundreds of manufacturing and service operations globally, to create global safety cultures and risk prevention processes for hundreds of thousands of employees. Results included more than 90% reduction in incident rates, prevention of thousands of injuries and cost avoidance of millions in costs, and documented business value in production, quality, products, services and employee morale. As the President of Breakthrough Results for the past ten years, her firm specializes in leading companies to achieve superior, sustainable safety cultures and business value results.
Christopher P. Skroupa: What’s changing in the intersection of value generation and ESG? What needs improvement, and what would be the consequence should those areas not see improvement?
Cathy Hansell: From an ESG perspective, it represents two aspects: One is the responsibility on the company’s part, and the other is the new opportunity that ESG can create. I don’t think that they’re exclusive, but rather they’re mutually supportive and intertwined. From a responsibility perspective, it’s managing the downside risks. Risks to be managed include injuries, environmental releases, explosions – all of which jeopardize the safety of employees, the environment and the community. Additional risks are managed to ensure business efficiency, continuity and resilience – like brand attractiveness, cybersafety, strong supply chain, crisis management, talent development, operational excellence (OE) and its “license to operate” within the community. OE also reaches to the optimal use water and energy, and to minimize waste. Other risks which need to be managed pertain to the customer, like product safety and health. Finally, risks to be managed reach into and beyond the communities for societal benefit of clean water, and health and education services.
I think how well these risks are managed is a reflection of the company culture. It’s about how a company operates, basically keeping its own health, safety and environmental (HSE) matters in order, with a strategic eye to the community and societal benefit. Its values and ethics are incorporated into its own operational and talent processes, and then reach beyond the company’s borders into the larger sphere. Thinking more broadly, the 17 United Nation SDG’s (Sustainable Development Goals) offer opportunities to manage risks inside and outside the company.
The new value, or upside, could be new products and services, and new markets from current products and services. Further, societal value, with issues like water and climate changes, new automotive power technologies, a circular supply chain with reuse and recycle, and meeting medical needs are all upsides, if ESG is incorporated into a business long-term planning. For instance, Orbis just launched a flying eye hospital, converting an airplane into a flying hospital. Their goal is to help end global blindness, by flying to developing countries and offering eye screenings, surgeries and training of local doctors and nurses. And let’s remember the employees themselves. Culture changes from the employee’s perspective can focus on safety, health and wellness, diversity, engagement and educational opportunities. From my experience, working with and for companies that transformed their culture to meet those employee needs, also saw an increase in trust and pride within the employees themselves, which in turn increased creativity, quality and teamwork. These are not soft issues, and generated defined, significant value when driven.
One thing that is improving, and yet needs more improvement, is the clear linkages of ESG successes and the definition of business success. The statement made by the CEO and Founder of Blackrock Larry Fink that “companies have more to do, than just make a profit. They have to show they’re making a positive contribution to society” embodies this linkage. This points to needed revised definition of goals, measures of success and role of ESG. This will lead to changes driven inside the company, as well as the expectations of the company from the investment community. These are two sides of the same coin, driving to the same result.
For example, long-term strategic plan, and the focus on ESG within that plan, are frequently mentioned as gaps to achieving ESG results. Turning short-term quarterly focus into a long-term strategic plan, beyond the typical three-to-five years. Investors may ask about short-term quarterly basis results, but also need to ask about the long-term plans and results. Long-term questions should ask about the business model and company culture. About 70% of ESG issues are addressed by a superior HSE culture (i.e. valuing HSE within the company culture). So, key ESG questions to a company should include the business long-term plan, its business model, its culture and role of ESG and HSE, metrics and how the company chooses to disclose this information.
Digging deeper, another area needing improvement is the valuation and tracking of intangibles, which facilitate ESG progress. Usually ESG-related issues are covered within the SG&A (Selling, General and Administration) portion of an income statement. SG&A expenses are the major non-production costs, and include HSE, Human Resources (HR), IT, training, and sometimes R&D and innovation. A recent study said only 15 percent of S&P 500 companies delineate and disclose how much money they spend on innovation and R&D. Breaking the SG&A into its components will highlight the financial support of those activities that directly impact ESG results.
However, there’s some good news in this situation. Some aspects of everything shared are not new. HSE excellence, and a company culture that revolves around HSE and its governance, have been done for decades. This work embodies governance, transparency, audits, insurance, 24 business process where HSE (now expanded to ESG) issues can and should be embedded. They form three groups: operational excellence, talent management and business planning and governance. I’ve done this work, by teaming with each business function and leader to explore their specific process, job tasks and relationship to HSE and ESG. Together we build HSE/ESG issues and factors into each of the 24 processes. Yes, it’s a lot of work and it’s very complex because there’s procedures, programs, processes and systems to consider. You’re looking at how a whole organization is run and designed, and how performance is tracked and assessed. It can be done. Improvement areas can then be easily be identified. This method creates lasting ESG success.
Skroupa: From the corporate implementation perspective, what needs improvement in management ESG integration strategies? What should be done to better drive the movement?
Hansell: The improvements in ESG integration come down to a few things. A relatively recent Mackenzie report stated that out of 1000 companies surveyed, about 85% are planning less than five years ahead. Also, of the long-term performance review plans for the S&P 500 companies, 85% are three years or less in length. When you put those two points together, organizations are not making long-term plans well, and there is no incentive to do so. Only 15% of them are doing that, and only 15% are planning more than five years. Incentivizing this long-term focus is a large part of what needs to be done differently, in order to help the meaningful ESG integration movement.
The other aspect that could and should be done is incentivizing the integration of ESG within the 24 business processes. Eleven of the 24 pertain to talent management and are owned by the HR function. These processes include new employee hiring, orientation, third party contracting, recognition and reward, discipline, leadership development and performance reviews, labor management and union negotiations, organization design, communications and health and wellness programs/benefits.
Think about how important all of those processes are to the overall success of how well ESG runs through an organization. It is critical that HR understand their direct role, and to look for the “win-win” opportunities of HR and ESG. It’s a question of the “what can we do together for the betterment of the organization?” That’s one of the critical changes that’s needed for ESG to have a lasting impact in an organization.
Another six process relate to OE – the way the business operations run. Examples include: operations; field force services; new product developments or process changes; quality improvements and initiatives like six sigma or lean; sourcing of raw materials and contractors; material and packaging recycling and reuse; energy and water usage; carbon footprint and GHG reduction; and waste reduction. Nothing happens by accident, everything is well orchestrated and organized. The remaining seven processes relate to Governance and Business Support include planning, goal setting, risk management, security, facility management and sustainability overall. Even activities like marketing and sales must be aware of the ESG issues that relate to product and service commitments of product features, composition, compliance and global availability.
The point is that every aspect of ESG incorporation must be deliberately built into how the business churns. I think this is one of the largest barriers that needs to be overcome in organizations for ESG to be embedded and yield successful results. Like I said, it’s a lot of work. It begins with common understandings of the desired end ESG state, and current processes. The business model and culture should make this easier to examine and improve the current processes, in alignment with business and ESG goals.
One thing I see lacking in many assessment frameworks is the “how to’s” for supplementing the performance result data. I’ve heard some ESG investors speak recently about relying on the performance data, without equally focusing on how the results were generated, and how they will be sustained or improved. Jack Welch has said talked about “…making the numbers dance”. The more important information is the underlying business processes, systems and culture which created the performance results, and the long term capabilities of these. This analysis work links to the above integration challenge, to fully understand the ESG integration strategy and results.
Skroupa: What, why and how a company discloses its accomplished/in-progress social impact is very important. Can you explain how these three items tie back to increasing a company’s value?
Hansell: There are 150 different reporting metric systems in place, with none being the overwhelming framework or rating system of choice. If that’s the case, how will a company share its data efficiently and effectively? SASB (Sustainability Accounting Standards Board) and GRI (Global Reporting Initiative) have attempted to gain agreement on the definition of “material.” Variability exists in what and how a company decides is material and how to disclose it in written reports, websites, press releases, nationally/internationally recognized systems (e.g. GRI, SASB, DJSI) and analysts calls. The intended audience is also a factor in disclosure, whether the investment community, employees, all shareholders, customers or public as a whole.
I’ve helped companies share ESG information, but it wasn’t just up to me for what was disclosed. It was a team effort and a screening process was used. I had selected SHE or ESG performance metrics, processes and examples. Others, from operations, technology, marketing, communication, legal and senior leadership also had their views too. Sometimes, what we wanted to share was too confidential from a competitive edge, so the company made the decision not to disclose it at the present time. For example, disclosing funding on new projects may not be the best situation to share at the present time, if it’s a new direction, product, service or market and still under development. The communications professionals screen disclosures because there’s an amount and depth of information that is interesting and understandable to specific audiences. So, after a variety of screens, what is disclosed is not the whole story. That’s an important bottom-line for investors who are looking at publically-available ESG information and company listings. Even newer metrics in SASB, GRI and DJSI (Dow Jones Sustainability Index) aren’t complete stories because they’ve got limits in what and how information can be presented. You’re never quite getting the full story from one source.
This gets into the “how,” to understand beyond the “what” is achieved. Seek the “how” did the company achieve the reported results and “how” will the company maintain and improve those results. Questions analysts and asset managers can ask, relate to our earlier discussion of long term objectives and plans, culture, robust processes of preventative design, motivating performance reviews and incentives, OE, talent development and innovation. These actions and measures are the hallmarks of current and future value of a company, where ESG is incorporated into the organization, for the long-term.
Asset managers must try to get the full story. There’s so much information that’s available and not regulated, so there’s an opportunity to grab the full story, albeit in pieces. The variety of content, detail and materiality is part of the reason why the investment community is reaching to SASB and other ratings – as the current best disclosures, supplemented with the “how to” information. Together, they provide a picture of an organization’s dedication to ESG and the organization’s culture and systems to achieve superior, lasting ESG results.
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