Environmental, social and governance commitments play a key role in the development of long-term strategies in periods of corporate change. Brittany Golob investigates the impact these policies have on culture, investment and reputation

Reckitt Benckiser is one of the largest consumer goods companies in the world. And its commitment to sustainability and environmentally friendly business practices is well-developed for a company of its stature. But, in 2015 it pushed its goals forward even further.

Its water conservation programme was emphasised. It started combatting childhood malnutrition. It committed to ambitious energy efficiency goals and it improved the diversity of its leadership team. In short, its environmental and sustainability goals tightened in focus. The shift in the business that compelled this recommitment to environmental, social and governance (ESG) objectives was RB’s acquisition of Mead Johnson Nutrition, which had a strong sustainability programme of its own. And, since 2015, the business’ share price has only gone up.

RB is not the anomaly, but nor is it the norm, in the ways in which ESG commitments are affected as a result of corporate change. To effectively communicate through periods of change, ESG can aid in uniting a fractured culture, appealing to investors and protecting corporate reputation.

“In many corporate changes, the destiny of the sustainability approach can be seen as a test of the culture of the new business,” says James Osborne, head of sustainability at Milan-based communications consultancy Lundquist. “To what extent is the transaction fuelled by short-term financial gains? How much are positive brand values or sustainability practices supporting the strategic rationale of the operation? The issues that arise go to the heart of organisational culture and purpose.”

When recycling and waste management companies Shanks Group and Van Gansewinkel merged in February 2017, it had to integrate behind a single objective: to become a global recycling firm. Supporting that goal was a rebrand, to Renewi, which helped unite the external brands. But the key internally was Renewi’s commitment to sustainability and CSR.

“The whole premise of the merger was taking the best of both companies and making it a much stronger and more vibrant company. The same thing was true with CSR. We’re quite lucky because we’re both recycling companies that focus specifically on recycling, not on landfill or mass burn incineration. We both played a very similar role in the circular economy. We’re both very passionate about sustainability,” says head of communications at Renewi, Helen Kemp.

Two of the primary focuses in terms of ESG were internal health and safety – the waste management industry is one of the most incident-prone – and the ongoing commitment to carbon-friendly business practices. Renewi is doubly lucky in that its business purpose is founded on recycling, so sustainability is to some extent, Renewi’s business. But the merger required a reexamination of these key points through the lens of culture.

Over the course of the next three years, Renewi will focus on integrating its workforces. But it has helped that each company was already fully committed to recycling. “Our purpose is really simple, it’s to give new life to used materials, and that’s what we do,” says Kemp. Organising the merger – or more accurately, the acquisition of the slightly larger Van Gansewinkel by Shanks – around that primary commitment has allowed Renewi to retain a strong focus on its ESG positioning. For a recycling company, it’s only good business practice.

But for other companies, the merger and acquisition process is not always easy in terms of culture, that’s where ESG ethics can play an even stronger role.

In 2009, EDF Energy redoubled its efforts. The French company had purchased British Energy, the UK’s largest nuclear operator, allowing EDF to commit to a 60% reduction in carbon output by 2020. That is now an 80% reduction target by 2050. In working toward to a carbon-free future through its acquisition, EDF has since become heralded as one of the biggest nuclear operators in Europe. But it also worked with its internal audience to ensure the corporate culture supported this shift in strategy.

The ‘Our compelling story’ programme combatted disengagement and the reluctance to embrace new goals. It targeted key leaders and employees by communicating about the company’s acquisition and future, encouraging engagement with its ESG objectives. The programme’s success led to EDF Energy winning the ‘Best internal communications’ award at the 2014 Corporate Engagement Awards.

But the internal audience is not the only one that must be considered during times of change. Investors and key shareholders have a keen interest in the operations of a business as well as in its long-term strategy. For that reason, Raj Shant, head of responsible portfolio management for Newton Investment Management, says investors are looking more at ESG programmes as a factor in their investment decisions.

“Of course it’s in those moments of great change that the foundations are put in place for the next several years of decision making, capital allocation, execution and delivery,” Shant says. He adds that companies should consider the ESG implications of any change before that change is to occur, as it will have an impact on the overall sustainability – in the fiscal sense – of the business. “Why do companies undertake M&A? Why do they have leadership changes?

Quite often, it’s in the pursuit of some new opportunity or to gain some perceived competitive advantage. Not to have ESG issues at the heart of how one evaluates that perceived opportunity or that perceived chance to gain a competitive advantage is actually remiss.”

Change to the ESG programme, or indeed risks related to ESG ethics as posed by poor business practices, it can impact the business’ outlook for the future. That’s not to say things can’t change. “Clearly there is a need to evolve when the strategy changes,” says Osborne. “But in these cases, it is defensible as a repositioning of the whole business, something that stakeholders can put into the bigger picture of change.”

“The reputational risks of overlooking ESG issues at times of change isn’t just bigger than it was before, it’s actually increasing all the time”

However, Shant advises against over-reporting the details of ESG projects to investors, particularly during a time of change. He says, “What needs to be done by the company in times of great change is simply to explain the principles on which they were considered and base those considerations into their decision making.” The very fact that they’re even doing so will prove to the stakeholder that it is a key strategic consideration for the business.

Kemp adds that Renewi’s commitment to ESG business practices is helping the publicly traded company succeed financially. “I think a lot of investors, especially ESG investors, are looking for green companies. We also have a green financing tool that we’re using as well. We are green not just in our operations, but in the way that we do things.”

Challenges remain, though, with regards to corporate reputation, particularly during periods of change. A failure to incorporate ESG commitments into the new strategic outlook of a business can have a ripple effect on its long-term success.

Shant says, “Every citizen practically, pretty much everywhere in the world, is a potential journalist. If a company is cutting corners or doing unpalatable things, it may seem a remote issue if there are bad practices going on at plants on the other side of the world. But, actually every citizen being a journalist means that those bad practices can be on the smartphones and on the desktops of every consumer and every worker in every part of your business, all around the world, within minutes.” He adds, “The reputational risks of overlooking ESG issues at times of change isn’t just bigger than it was before, it’s actually increasing all the time.”

Ethical sourcing and diversity issues are never out of the news. One of the most recent challenges to a company’s ESG commitments was Iceland’s potential Christmas campaign communicating its stance on palm oil. The Christmas advert controversy shone a light on this practice, but it also sparked a debate about the use of palm oil more generally. Iceland may not have suffered directly, but its reputation was on the line. Gillette too, in its recent ‘The Best a Man Can Get’ advert got people talking for some of the wrong reasons. It proved that taking a strong stand on a gender equality issue is not always the best way to communicate about gender equality as a business.

But, if integrated effectively into the business’ change management strategy, ESG programmes can lend a greater hand in terms of maintaining corporate reputation. As with the Renewi and EDF cases, using ESG as a means of uniting a business after a merger or acquisition has proven successful. Having strongly embedded, effective and strategically sensible ESG policies proves that a company is thinking in the long term, that it is committed to its audiences and that it foresees the far-reaching risks its business might encounter. Shant calls it a “non-financial signal” that a company has a long-term strategy in place.

Reckitt Benckiser after its acquisition of Mead Johnson Nutrition, exemplified this by putting the latter’s ESG objectives – like tackling childhood malnutrition – into place company-wide. Over a year later, it is well on its way to achieving some of those objectives.

ABInBev, on the other hand, has seen its share price drop since its acquisition of competitor SABMiller. The latter had hard, business-critical goals for its sustainability, writes Scarlet McBarnet, associate at sustainability consultancy Context. The former took a softer, citizenship-based approach. Since the merger, ABInBev’s strategies seem to have prevailed, eschewing the more strategic positioning espoused by its acquiree.

Osborne points to the relevance and strength of the ESG commitments in the first place. Corporate change can be the ultimate test. “Are they strong enough to be given a new lease of life in the new, bigger business? If they fall by the wayside, it becomes clear to all that they did not have a strategic rationale. Clearly, projects can’t be just abandoned because that would undermine trust in the business as a reliable partner. Change has to be gradual and explained: better an evolution than a sudden change of tack,” he says.

Osborne cites work Lundquist carried out with Yoox Net-A-Porter on the companies’ merger. Lundquist examined Yoox’s existing commitments and considered Net-A-Porter’s brand positioning, as the luxury e-commerce space has no tradition of ESG commitments, before forming a single strategy. Organising the sustainability and CSR programme around the three main pillars of education, empowering women and responsibility, Lundquist was equipping the company with the ability to improve its governance, its investor communications and its longevity as a successful operation.

For Renewi, it’s a similar story. Sustainability is embedded into the company’s very operations, making for a meaningful, considered strategy. Kemp says, “There’s intentionally not a head of CSR on the exec committee because we see sustainability and CSR not as the responsibility of one person but as the responsibility of each MD and everybody within Renewi. That’s why sustainability is one of our
key values.”

When considering the commitments a company makes to the environment, its people or its community, especially during times of change, culture, investor communications and reputation management all rely on the same thing – embedding those practices into the very fabric of the business.