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Deals & Dealmakers

ESG and DEI Key Contributors to Long-Term Stakeholder Satisfaction and Competitiveness

by Pay Wu, President, MWBE Unite, Inc.

Environmental, Social and Governance practices (ESG), or stakeholder capitalism, has been embraced by corporations and their leaders at an accelerated pace over the last decade.

Corporate leaders are increasingly embracing the idea that when businesses work sustainably, the world works better for all involved – this includes the people, the environment and ultimately the business itself. In this way, longer term value is created and will supersede short-termism* by including a broader ecosystem where more stakeholders that include employees, consumers, suppliers, communities, investors and shareholders all become involved together.

The Pursuit of Stakeholder Satisfaction

Historically, corporate management prioritized financials and shareholder satisfaction above all other factors. Today, enhancing company performance while meeting critical social and environmental needs are at the heart of creating the future of resilient businesses. Disparities in gender and race, wage discrimination and environmental stewardship now weigh importantly on the concept of success and future world we all live in.

Our country shares a rich history of progress and economic prosperity, often the advancements are based on business operating models that include diversity and creativity of immigrant participation and globalization. Previously, institutional business models operated based on the belief that lean margins and siphoning off profits defines the successful corporation. Post-COVID, the emphasis now includes human capital losses and supply chain impacts, that shape the local and global economies and where people work, live, play, and study.. Companies are integrating into their ESG agenda, beyond financials, the consideration for sustainability of supply chain ahead of costs, sustainability of their labor, and social impacts to the community in which they operate. Definition of stakeholders has expanded for the good.

Equality as a Decision-Making Factor

Fortunately, equity and inclusion are standing corporate agenda as DE&I initiatives are seeing progress, and awareness reaches beyond Corporate Board rooms. The reason? It makes good financial sense to include equality in decision making now. A study from “Women Count 2020” showed that including women in business strategies was likely to increase net profit margins 10X over those without women serving on executive committees. Emphasizing DE&I also brings a range of perspectives that help companies better understand their clients/consumers and therefore competitive for increased market share.

Corporations and business executives now acknowledge that stronger teams are built by hiring diverse candidates with differing values, professional or academic backgrounds, and personal preferences.

DE&I a Key Component of Reporting

Intersection of DE&I and ESG meet at this opportune moment as organizations determine what to include in their ESG plans and investments. Companies recognize DE&I as an essential component of their ESG roadmap. Pronouncements and commitments without actions and transparency around DE&I may be detrimental to long-term competitiveness, brand reputation, and negatively impact financial condition. In commercial real estate, for example, investors are interested in ESG and want to see
evidence of progress and governance as part of making meaningful investments. Digital transformation post COVID has accelerated and companies require sourcing for functional skills from more diverse labor. There is a clear need for adherence as well as a direct benefit then for including DE&I in the ESG framework.

Perspectives on human capital are undergoing change, and together with ESG, it is possible now to build a more equitable business culture and create greater long-term value for all stakeholders. With ESG standards, businesses now have the opportunity to demonstrate their stewardship and responsible impact. Both risk and reward will be mutually beneficial in the new order of stakeholder capitalism with a promise of a more inclusive world.

*Short termism has its own common sense meaning, but in a business environment short- termism refers to the idea that a company manages the earnings report for shareholders each financial reporting period. This has been criticized since managing
the earnings report falls short of investing in company growth. It’s a huge topic in what they call “agency theory” – Although, short termism also means just what it says, not looking at building anything for the long term, just a quick go at making a profit for the benefit of a few people.

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