From climate change to human rights and executive compensation, a growing list of environmental, social and governance (ESG) metrics make up the non-financial factors used by investors to evaluate businesses. While the ultimate objective of the ESG approach to company valuation is financial performance, this is done in the context of social responsibility, an area in which business leaders face increasing pressure to demonstrate progress. But what is the contribution of the COO in developing and implementing ESG strategy, and how can the resulting value creation be quantified?

Contributors to organisational culture, such as diversity and inclusion, have been shown to positively impact business profitability, principally through risk mitigation and brand improvement. This ESG concern, which sits largely under the social pillar, has recently seen interest – from employees and leaders to regulators, investors and the media – rocket on the back of social unrest in 2020.

Backed by myriad studies published over the past decade, the business case for all types of workplace diversity (gender, ethnic and cognitive, to mention a few) across organisations is undeniable. According to Deloitte, companies demonstrating diversity across multiple employee levels enjoyed 2.3 times higher cash flow per employee, while McKinsey found companies in the top quartile for gender inclusivity to be 21 percent more likely to experience above-average profitability.

While traditionally an HR concern, the gradual move to seeing culture, and more specifically diversity and inclusion, as issues impacting the bottom line, has also brought them onto the radar of the COO. A good starting point for the COO looking to impact internal diversity and inclusion as an ESG priority is to understand how these factors fit into their organisation’s business strategy, as well as recognising the principal metrics being used by ESG rating firms and investors, and exploring different frameworks for standardised ESG metric reporting and disclosure.

To effectively tackle diversity and inclusion, it’s essential that the business leadership team has agreed on clear values and robust metrics from the outset. Without this clarity and genuine buy-in from key decision makers, it can prove difficult to stay on track and achieve the desired goals.

As with all ESG metrics, diversity and inclusion criteria will vary from one organisation to another, and one size definitely does not fit all when it comes to developing a diverse workplace culture. Based on an organisation’s criteria a COO will need to work with the HR team to build a realistic strategy for meeting their company’s diversity targets and ensuring an inclusive environment in which all employees can thrive.

Consideration in the development of a strategy may be given to the different stages of the employee lifecycle, as well as diagnosis and prioritisation of any risk areas, tracking of initiatives for improvements, and the measurement of investment returns. This may lead, for example, to the updating of recruitment practices, refreshing diversity training, updating talent development programmes, or creating flexible working policies.

While diversity and inclusion are frequently tracked, they are rarely reported to the workforce. Yet communication has been shown to engage staff and raise awareness of an organisation’s efforts in this area. As a leading influencer on the ground, the COO can play a vital role in communicating strategy around diversity and inclusion, as well as role modelling inclusive leadership. Once employees see a visible commitment from leaders, this will have a positive effect on their trust and commitment to the issue, as well as to the company brand in the longer term.

For both the ESG-focussed investor and the COO wanting to monitor ongoing company performance, transparency around metrics and key performance indicators is vital. While taking a data-driven approach would seem the most effective way to track and report the link between ESG factors and value creation, in reality quantifying and articulating the positive effects of the less tangible social criteria can prove challenging.

To overcome these hurdles and successfully quantify cultural improvements, collaboration between a COO and internal stakeholders able to support data gathering and reporting efforts (e.g., HR, IT and finance) is essential. In the case of diversity and inclusion, positive outcomes can include greater innovation, better talent attraction and retention, a reduction in employee litigation, reputational and brand benefits, and overall greater employee satisfaction. Studies on these factors have demonstrated positive correlations to financial performance, with benefits coming in the form of increased revenue generation, improved share price, and cost savings.

In all cases, establishing a starting baseline for each criterion to be assessed is critical to the tracking progress, along with an understanding that measuring diversity and inclusion will take time, especially where historical data is lacking. Regular monitoring and setting of future improvement targets will be needed to meet investor expectations around ongoing progress and accountability – culture is an area where there is always room for improvement.

However they decide to go about it, organisations must be genuinely invested across all levels if they are to positively impact culture for the longer term, and quick fixes or checking off hiring boxes will not work. ESG helps companies focus on sustainability criteria that are most essential for driving positive business outcomes. These in turn are known to produce a positive knock-on effect on crucial aspects of employee wellbeing and engagement, including enhanced satisfaction, improved productivity and long-term loyalty.

If you would like more information about how Opsion’s flexible COOs can support your organisation’s ESG strategy, or have an interest in joining our COO network, please contact us at [email protected].