By aligning financial interests with broader societal and environmental concerns, corporations hope to create sustainable value for shareholders and contribute to society. Companies considering this move will benefit from caution and guidance.
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Increasingly, US corporations grapple with tension between a need to maximize profits and shareholder value with efforts to address environmental, social and governance (ESG) concerns through ESG initiatives. In our work with publicly traded clients across all industries, at Gallagher we're seeing a shift away from focus on ESG in incentive plan design toward what has long been known as the Corporate Sustainability Index (CSI).

Refocusing incentive plan accountability to investors and shareholders, over customers and employees

ESG has long been a focus for stakeholders, including customers and employees, and for good reason. The term "ESG" often resonates with stakeholders because it embodies broad sustainability values and corporate responsibility initiatives.

While prioritizing profits in the short term may seem beneficial, neglecting ESG concerns can have long-term negative consequences. Issues such as environmental degradation, social inequality and governance failures ultimately can harm a company's reputation, increase regulatory scrutiny and even lead to financial losses. Integrating ESG principles into corporate strategies can contribute to long-term sustainability and resilience.

However, CSI-related measures are gaining traction with investors and shareholders as part of an effort to respond to market challenges and enhance financial measures. The term "index" suggests a structured framework for evaluating companies' sustainability performance. This measured approach can help enhance accountability and transparency as companies strive to meet or exceed CSI benchmarks. A standardized CSI could facilitate comparisons across companies and industries. Such comparability can aid investors, analysts and other stakeholders in evaluating and benchmarking corporate sustainability practices.

The CSI concept also reflects a growing recognition that sustainability initiatives aren't merely add-ons or side projects, but represent fundamental components of corporate strategy and success. By incorporating sustainability into core business objectives, leaders acknowledge the interconnectedness between their operations and broader societal and environmental concerns. For example, diversity, equity and inclusion (DEI) embodies an essential aspect of corporate sustainability and responsible citizenship. Companies recognize the importance of fostering diverse and inclusive workplaces, not only as a matter of ethical responsibility, but also for the tangible benefits it brings to organizational performance, innovation and stakeholder relations.

Similarly, factors such as reputation, corporate compliance and stakeholder satisfaction — including customers, shareholders and suppliers — also play crucial roles in shaping corporate sustainability efforts. A positive reputation for ethical behavior and responsible business practices can enhance brand value, attract investment and strengthen relationships with stakeholders such as customers and the community.

By prioritizing corporate sustainability and embedding these principles into their operations, companies can build trust, mitigate risks and create long-term value both for shareholders and for society as a whole.

Benefits of reframing ESG to CSI

Reframing from ESG to CSI delivers several potential advantages to support a more targeted and specific framework for evaluating corporate behavior and sustainability practices. Benefits may include:

Clarity and focus

ESG can be confusing to some stakeholders — particularly shareholders and inventors — because the term can be difficult to quantify. By contrast, CSI measures results associated with actions, to provide a more focused message regarding the purpose and scope of the evaluation framework. CSI emphasizes the importance of sustainability practices, such as waste reduction, recycling and reducing packaging, as a central component of corporate performance assessment.

Enhanced recognition and understanding

Recasting ESG as a CSI may enhance recognition and understanding among shareholders, including investors, analysts, policymakers and the general public. CSI simplifies terminology and helps create a common language for discussing corporate sustainability issues.

Standardization and consistency

The hodgepodge of ESG reporting frameworks, such as Task Force on Climate-Related Financial Disclosures (TCFD), Sustainability Accounting Standards Board (SASB) and others, can confuse organizations trying to establish sustainability reporting. Due to uncertainties around reporting framework methodology and data accuracy, the appearance of "greenwashing" — falsely inflating environment benefits — becomes a major challenge. As a result, some organizations will focus on the bare minimum disclosure devoid of actionable goals or sustainability initiatives. Consolidating disclosure standards may facilitate comparisons across companies, industries and regions, making it easier for stakeholders to assess performance and identify best practices.

Facilitating dialogue and engagement

The term "CSI" can facilitate dialogue and engagement between investors and companies regarding sustainability issues. The term provides a common language for discussing sustainability performance and encourages transparency and accountability in setting goals and showing meaningful progress toward goals.

Supporting the creation of long-term value

Emphasizing sustainability through the CSI framework encourages companies to prioritize creating long-term value over short-term gains. Investors can better assess the resilience and sustainability of companies' business models, mitigating risks like greenwashing by aligning progress with actionable goals. Examples include adopting renewable energy sources, water conservation and eco-friendly agricultural practices, associated with ESG factors.

Increased credibility and trust

Adopting a well-defined CSI framework could enhance the credibility and trustworthiness of sustainability assessments. Companies that actively participate in CSI evaluations and report their performance transparently signal their commitment to responsible business practices. Such discipline can enhance their reputation and stakeholder confidence.

Encouraging accountability and improvement

A CSI framework can serve as a tool for holding companies accountable for their environmental and social impacts. Publicly disclosing CSI scores and rankings can create incentives for companies to improve their sustainability performance over time, leading to positive outcomes for both business and society.

Creating a "win-win" for the company and society

By aligning financial interests with broader societal and environmental concerns, corporations can create sustainable value both for shareholders and for the world.

Shifting focus from ESG to CSI offers the potential to enhance the understanding, adoption and integration of sustainability considerations within the investment decision-making processes. At the same time, a well-designed CSI program can increase shareholder value and support the corporation well into the future. A holistic, expert review of the incentive plan design may help to address any concerns from stakeholders more used to an ESG approach, as well as from investors who may prefer clear-cut financial measures. By providing investors with a standardized framework for evaluating corporate sustainability performance, CSI contributes to more informed investment choices and encourages companies to embrace sustainable practices for the benefit of all stakeholders.

To learn more, visit Gallagher's Executive Compensation team.

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Consulting and insurance brokerage services to be provided by Gallagher Benefit Services, Inc. and/or its affiliate Gallagher Benefit Services (Canada) Group Inc. Gallagher Benefit Services, Inc. is a licensed insurance agency that does business in California as "Gallagher Benefit Services of California Insurance Services" and in Massachusetts as "Gallagher Benefit Insurance Services." Neither Arthur J. Gallagher & Co., nor its affiliates provide accounting, legal or tax advice.