The topic of environmental, social, and governance (ESG) values has recently become more prominent in advertising industry publications. If you have questions about the difference between ESG and the more familiar "purpose," or why ESG values are suddenly more relevant to agencies, read on.
Most importantly, what should agency leaders be doing in response to the rising importance of ESG values? What do you need to know, and how might this affect the way you serve clients? Here is a recap of some key takeaways. As always, I’m most interested in how this will affect agencies from a new business perspective and have included some considerations for agency leaders to be aware of.
What is ESG, and why is it suddenly in the headlines?
The ESG terminology may be less familiar for some of us in the advertising industry. It has made some recent headlines due to new research published by the Institute of Practitioners in Advertising (IPA) in the UK and an investor presentation WPP’s Mark Read recently delivered addressing ESG.
The concept and importance of ESG has been evolving in financial circles for decades, going back to an idea introduced by John Elkington in the 1990s as the “Triple Bottom Line,” or “People, Planet and Profits (PPP),” which was intended to measure sustainability (Indiana Business Review).
According to Investopedia, ESG refers to a set of standards that are used to help investors evaluate potential investments for future financial performance. The way that companies manage their environmental, social, and governance concerns are calculated through both qualitative and quantitative measures into scores that help investors understand where they fall in terms of potential risks and rewards. For example, investors hope ESG will help them avoid the losses associated with disasters such as Volkswagen’s emissions scandal and BP’s oil spill (Charles Stanley). ESG investing has also been called “green,” “eco,” “ethical,” “sustainable,” and “socially responsible” investing.
“At the heart of ESG investing is the simple idea that companies are more likely to succeed and deliver strong returns if they create value for all their stakeholders — employees, customers, suppliers and wider society including the environment — and not just the company owners. Consequently, ESG analysis considers how companies serve society and how this impacts their current and future performance.” — Janus Henderson Investors
Using ESG to guide investment decisions was once seen as philanthropic in nature and limiting to potential profit. More recently, a growing body of research shows a correlation between strong ESG values and profitability. McKinsey & Company’s Robin Nuttall cites “more than 2,000 academic studies [with] around 70 percent of them [finding] a positive relationship between ESG scores on the one hand and financial returns on the other.”
What falls under the umbrella of ESG?
Examples of environmental criteria:
- Climate change
- Carbon emissions
- Waste and pollution
Examples of social criteria:
- Diversity, equity and inclusion
- Human rights, including child labor and slavery
- Local communities
- Consumer protections
- Animal welfare
- Health and safety
Examples of governance criteria:
- Donations and political lobbying
- Investments and relationships
- Tax strategy
- Management structure
- Executive compensation
- Employee relations
What is the point of grouping this diverse laundry list of issues together? All of these factors influence a company’s perceived license to operate, says McKinsey & Company's Robin Nuttall. He continues, “Consumers are now demanding high standards of sustainability and quality of employment from businesses. Regulators and policymakers are more interested in ESG because they need the corporate sector to help them solve social problems such as environmental pollution and workplace diversity.”
Nuttall also says the investor community “has become much more interested,” with roughly a quarter of assets under management in the US being ESG-rated investments.
Why does ESG matter now?
In recent years, ESG has been increasingly tied to fiduciary duty, elevating its significance. Consequently, as of March 2021, investment professionals in the European Union are subject to new regulatory requirements to consider ESG matters when making investment decisions (Charles Stanley).
Additionally, some outlets have reported that ESG has become more valuable amid COVID-19. For example, Ernst & Young Americas reports, “... strong ESG programs may help buffer the impacts of the current crisis, hasten recovery, spur innovation needed to navigate a “new normal” and reduce risks to additional crises in the future.” They also note ESG funds have shown stronger performance than non-ESG rivals amid COVID-19.
As for the future, given the ongoing pressures of climate change, DE&I and other issues, it seems ESG’s importance will only continue to grow.
To clarify, ESG is not only an issue for companies and their investors. Nor is it just an issue for agencies and their clients. It’s also an issue for consumers, employees, governments, the environment, and larger society.
How does ESG relate to how agencies serve clients?
In a recent post about the emergence of the chief brand officer role, WARC’s editors explained: “Over the last two years or so, issues that were previously of relatively little concern to consumers — how employees are treated, how ethical supply chains are, how much attention brands pay to diversity and gender issues, and what they are doing about the climate crisis — have become a crucial influence on how many perceive brands.” Investment considerations aside, brands care because consumers care — and it’s impacting how they buy.
WPP’s Mark Read recently spoke with Campaign about ESG, saying that “demand is off the scale” for ESG-related work. Not only are clients demanding it, he says, but so are consumers. Agency employees and prospective employees want it, too. Moving towards greater realization of ESG values can have positive impacts across the board.
“There’s no trade-off between business performance and our ESG strategy — they are inextricably linked. The more we live up to our purpose, the better it will be for our business...” — Mark Read, chief executive of WPP (in Campaign)
A graphic featured in Campaign’s article states that “100% of [WPP agency Hill+Knowlton Strategies] briefs from the US & UK now mention ESG,” while Cartwright (another WPP agency) saw a 150% increase in ESG billings in 2021.
The work WPP’s agencies are undertaking spans internal and external audiences from strategy to delivery, and much of it seems to be about helping clients “communicate what they are doing” around ESG to their audiences. But the push to further ESG values is also about agencies helping clients be better and do better so that they can authentically present themselves as better. That is potentially a broader role that may require a mindset shift, which I’ll address more below.
Read says WPP’s clients “want to work with companies that share the same values as them.” The implication is that agencies should be working to do better on their own ESG journeys if they want to keep up with potential clients and retain their business.
The flipside is agencies who are further along in their ESG efforts may not want to work with clients whose values are inconsistent with their own. Making those choices and taking actions that reflect a company’s stated values are part of what differentiates greenwashing or purpose-washing tactics from real ESG leadership, according to Read. Demonstrating ESG leadership means going beyond lip service.
Showing leadership on ESG values may give your agency a new business edge
According to new research commissioned by the IPA, agencies that demonstrate their actions around ESG values may have “a competitive edge” when it comes to new business. While this “may not win new business outright, it could prove to be a valuable differentiator” for agencies.
25% of clients have started working with an agency due to good ESG practices, and 16% have stopped using an agency due to poor ESG practices. (IPA, via Campaign)
IPA representatives Marc Nohr and Julian Douglas further explain that it's becoming more important to demonstrate a commitment to ESG, as it grows beyond a moral imperative, to “increasingly become a business imperative.”
The IPA bases its conclusions on data that show 84% of those surveyed “agree that ESG is, and will become increasingly important in day-to-day practices, with 51% saying the coronavirus pandemic has accelerated this.” Their research was conducted by Opinium, which used quantitative and qualitative interviews with marcomms leaders from financial services, FMCG and food and drink sectors (presumably based in the UK).
Noting the limitations of the survey and the fact that it also found brands still “prioritize core hygiene factors [like demonstrating effectiveness, creative solutions, experience, and chemistry] over ESG credentials,” one might be forgiven for questioning whether the immediacy of these findings is overstated.
How you should interpret the importance of IPA’s research may come down to your agency’s values, the clients and verticals you serve, and whether you prefer to be the early bird or a latecomer to the party. If your agency is already purpose-led and strong on ESG values, you may want to tweak your positioning and messaging to be more aggressive about owning your expertise in this space. If not, you may be better off thinking about some “baby steps” that are realistic for your agency and will keep you from appearing too out of touch.
What is the cost of not helping brands be better?
Shaun McIlrath of Iris recently put forth a compelling argument for why agencies should strive to affect the behavior of both consumers and brands. I’ll share some key takeaways from his article, but I recommend reading it for yourself as it’s very relevant to the discussion of how agencies should respond to the elevated importance of ESG values.
McIlrath writes that an agency's job is bigger than selling; rather, it’s about removing or neutralizing barriers to help the consumer buy. Those barriers may be price, customer experience, ESG policies, or other considerations. When we ignore those barriers and insist on selling by talking at people and bombarding them with messages, he says, “we are at our least relevant and most obnoxious.”
According to McIlrath, “... if there is a disconnect between an advertising artifice and the reality, it creates distrust, not just of the company but of advertising per se,” which is an important observation because it means when we continue to produce creative as we have in the past for the current and future context, we risk undermining our own value as agencies.
“If we are to remain relevant, we must realize that we are not just in the business of creating better advertising, we are in the business of helping to create better, more competitive consumer propositions — better companies.” — Shaun McIlrath of Iris, in Campaign
McIlrath concludes with a push to change advertising from what it has been (where agencies “act as creative intermediaries between a brand and consumers”) to what it needs to be (working “in both directions,” affecting both the behavior of the consumer and the brand). His vision is a roadmap for how agencies could work with brands on ESG values.
With that in mind, not taking action on ESG values may be a missed opportunity to regain relevance and respect for your agency (and advertising in general). That is something agencies desperately need so they can stop doing more for less and return to profitable, equitable, and sustainable client relationships.
Additionally, as per IPA’s research, not taking action on ESG values may be a missed opportunity for your agency to differentiate itself relative to competitors and secure a new business edge.
If you agree with McIlrath’s argument, then not taking action on ESG values (by helping clients address their broader issues) may also lead to less effective advertising campaigns.
In many ways, ESG is an extension of conversations and actions most agencies have already been undertaking. One takeaway is that if corporate finance is talking about ESG, then maybe agencies should also be talking about ESG, instead of purpose.
On another level, agencies should do a pulse check to assess whether they are on track to close the future business they want, or if they need to make some shifts. Does your agency need to show more action on ESG values to be competitive? Do you need to change the way you provide services to clients? It’s always a hard ask for agencies to consider taking on more, particularly when resources are stretched thin. But because this could be an important opportunity for some agencies to increase their perceived value, it's worth considering.
- ESG values are becoming more important for companies (and governments, consumers, society, the environment, employees, and everyone)
- Agencies have an opportunity to improve their leadership and demonstrated action around ESG values to become more attractive to potential clients
- Agencies that are purpose-driven or doing good in other terms may want to shift some of their positioning and messaging to speak the language most familiar to companies and not miss opportunities to capitalize on their efforts
- Leadership on ESG values requires action, not just lip service
- Agencies will be increasingly judged by potential clients based on their ESG values (as expressed through the companies they work with and their DE&I practices, for example)
- Agencies may need to push back more on clients to create work that is effective for the current and future context (and not just “product propaganda”)
- Being proactive with clients on this could present an opportunity for agencies to regain power in client-agency relationships and once again become “trusted advisers”
- 5 Things To Consider Before Working With Regulated Or Controversial Brands
- Where Purpose, Brand Performance, and New Business Intersect
- How Brands Nail or #Fail Brand Purpose, with Max Lenderman
- Ad Industry Diversity: The New Business Perspective
- How Agencies “Present” on Diversity to Prospects Now