Crain's Content Studio

SPONSORED CONTENT

BUSINESS SUCCESS THROUGH ESG

Strategies For Long-Term Profitability

In today’s rapidly changing business climate, a robust environmental, social and governance (ESG) program can open up access to large pools of capital, build a stronger corporate brand and promote sustainable long-term growth benefiting companies and investors alike. Three Chicago-area executives involved with ESG shared their thoughts with Crain’s Content Studio on why a successful ESG strategy matters now more than ever.

How is your organization involved with ESG? Cristina DeMento: As a valuesdriven business, NGE’s ESG efforts inform virtually every aspect of our relationship with our people, our clients and our communities. We view it as our responsibility to have a positive impact on all of those groups over the longterm. Our environmental footprint strategy seeks to address greenhouse gas emissions and waste across our operations through more efficient energy consumption, environmentally friendly policies and reducing the waste we send to landfills. Our efforts earned a gold rating for the American Legal Industry Sustainability Standard assessment. Through education and opportunity, we’ve cultivated a culture that strives to encourage everyone to come to work as their authentic self. We achieved Mansfield Rule certification, which recognizes law firms for meeting external diversity and inclusion advancement goals related to hiring and retention. Committed to the holistic well-being of our people, we instituted innovative family benefits, including homecare resources for aging relatives, identity theft protection services and stress-management guidance. We’re governed at all levels by our commitment to operational excellence, high professional and ethical standards, and responsible business practices.

Ted Hamilton: Elkay has focused on ESG for decades. We’ve always supported social change—by advocating for healthy hydration in schools and pure, filtered public drinking water, designing innovative

stream. This made Elkay’s sustainability more visible to the public. With the recent introduction of bottle fillers and beverage dispensers for home, office and hospitality settings, we’ve extended sustainability into even more environments.

Stacey Sargent: ESG is a valuable and recognizable framework that can be leveraged to help our clients incorporate their preferences about the companies they’d like to own in their portfolios. The best client conversations start with a discussion of the “hows” rather than the “whats.” In that context, we see our role as translating their preferences into actionable and informed investment decisions. We monitor companies that score highly on sustainability and governance goals, as well as the more traditional investing frameworks.

What types of ESG issues are important to your customers/ clients?

Sargent: While every client viewpoint is unique, we’ve encountered worries about the impact of carbon emissions by large corporations, the treatment of employees in manufacturing and distribution facilities, inclusion policies and data collection practices to name a few. Often a particular component of ESG will stand out as more important to our client than the others, due to a personal experience, a value system that does not fit a specific definition, or perhaps strong feelings of family members. This is why conversations with our clients and internal reflection on their part are essential to our process.

CRISTINA DEMENTO Partner Neal Gerber Eisenberg cdemento@nge.com 312-269-5273

customers, communities and the planet? These are all crucial issues that individuals and companies should all care about. Since “being in business forever” is one of our core values, we’re committed to protecting the planet and natural resources that make that possible. In today’s world, current and prospective employees want to align

TED HAMILTON President - Elkay Plumbing Elkay Manufacturing Co. ted.hamilton@elkay.com 630-575-4742

themselves with companies that have an underlying purpose and that positively impact the world. They care about our philanthropy and volunteering.

DeMento: I work with many growth companies and their investors.

Starting from the earliest stage, these companies face pressure from investors

Making the world a better place.

From our nationally recognized sustainability efforts to our legacy of providing access to justice for the less fortune through our pro bono program, we are proud to serve as a catalyst for positive change in the communities where we live and work.

—TED HAMILTON, ELKAY MANUFACTURING CO.

As a values-driven business, we are committed to fully integrating ESG into both our culture and our client service. Whether it’s evaluating our clients’ investments to ensure the alignment with their business objectives or counseling on compliance with regard to various local and national regulations, we value the opportunity to work in concert with our clients to build a better future for everyone.

ADA-compliant products and making strategic donations. Cradle-to-cradle products matter when people remodel their kitchens. We’re proud that the stainless-steel sinks at the heart of our business are made from one of the world’s most recycled materials.

These became 100 percent recyclable when we replaced sound-deadening spray with removable pads. Our quartz sinks will be 100 percent recyclable by 2023. Our ezH2O water bottle filling stations launched during the bottled water craze, immediately reducing single-use plastics in our global waste

To learn more about our efforts, please visit: www.nge.com/CSRreport

“. . . EMPLOYEES WANT TO ALIGN THEMSELVES WITH COMPANIES THAT HAVE AN UNDERLYING PURPOSE AND THAT POSITIVELY IMPACT THE WORLD.”

Hamilton: In addition to the “number of bottles saved,” our customers ask us to report on our investment in employee development, health, safety, diversity, inclusion, equity efforts and the environmental impact of manufacturing. Customers want to know, are we good to our people? Do we protect employees and treat them equitably? Do we protect the planet?

From a governance standpoint, do we behave honorably and run our business soundly and ethically? Do we take a long view toward employees,

STACEY SARGENT CCO/Partner Chicago Capital ssargent@chi-cap.com 312-429-2335

to identify and retain a diverse board and management team, adopt antiharassment and inclusion policies, and incorporate sustainability as part of their branding and marketing efforts.

One topic currently receiving a lot of attention in the venture capital community is the lack of funding being directed to companies led by women

BUSINESS SUCCESS THROUGH ESG

Strategies For Long-Term Profitability and people of color. We’ve seen many efforts to address this by our clients, including new funds forming to invest specifically in companies founded by women and other underrepresented groups. Public companies face similar pressures, and third-party ratings agencies now focus on evaluating these companies’ performance on everything from carbon emissions to community relations to policy influence.

What are some common components of an ESG strategy?

Hamilton: Our ESG strategy focuses on business operations and global touchpoints. Social components include fair labor practices, safety programs and policies. We want employees to spend many years with us, so we pay competitive, equitable wages and invest in people and local communities.

We treat employees, customers and suppliers well, making it easy to build successful long-term relationships with us. Our products are safe and solve consumer concerns. For example, besides providing healthy hydration post-pandemic, Elkay’s hands-free bottle fillers, drinking fountains and faucets eliminate high-touch public surfaces. Our operations have a low ecological impact, with some products reducing environmental plastics generated by other firms. We’re working toward circular economy strategies to reduce our long-term product footprint. Though privately

held, we manage board composition, succession, independent directors and formal committees like a public firm.

The most critical governance issues often come down to solid values and training people to make ethical business decisions.

Sargent: We seek out investment opportunities where environmental, sustainability and governance goals improve outcomes for company stakeholders. A great example of this is our investment in Kornit Digital, where sustainable practices in their dyeing process reduces waste, improves the cost of production and increases shareholder returns on investment.

In what ways does an ESG strategy add value to an organization?

DeMento: A strong ESG strategy can benefit an organization by enhancing brand reputation and customer engagement, and by helping recruit and retain employees. Some investors think commitment to an ESG strategy can also help mitigate environmental, social and governance risks, which can be very costly and damaging to address after the fact. While these benefits are often intangible and harder to quantify than the return on some other investments, there are studies showing that companies that prioritize ESG perform better over time. This, together with the increased focus investors are placing on ESG, shows that “doing

good” can co-exist with—and be a critical component of—”doing well.”

We’ve definitely found this to be true at our firm. We’re a stronger organization because of the diverse opinions and people represented.

Hamilton: Having a solid ESG strategy is essential in today’s world. Many of our global customers ask us to report on our approach to ESG-related issues, share our policies and practices, and establish targets and identify our progress toward these goals over time. As part of our customers’ supply chain, we’re accountable for our ethical business practices and have a sound approach to our impacts on people and the environment. Increasingly, we’re asked

and a framework that helps us better understand how our clients wish to express their interests and preferences in the companies that they own. Many of the companies we invest in also seek to incorporate these practices in an effort to respond to their customers.

we’ve taken an honest, critical look at where there might be systemic equity issues we can address. My advice?

Don’t get too hung up on being perfect.

What’s important is looking at your gaps honestly and taking proactive steps to reduce them.

What steps can organizations take to ensure diversity and inclusion (DEI) from recruiting to hiring to performance management?

How can organizations ensure that day-to-day business behaviors align with their governance policies?

Sargent: Organizations committed to DEI should actively pursue diversity through their recruitment and hiring process, with full support from management at all levels. The

Hamilton: Education is the single most powerful tool that we have as business leaders to ensure that day-today business behaviors align with our cultural expectations and governance policies. Every employee should be

“ . . . THERE ARE STUDIES SHOWING THAT COMPANIES THAT PRIORITIZE ESG PERFORM BETTER OVER TIME.” —CRISTINA DEMENTO, NEAL GERBER EISENBERG to report on the practices of our partners within our supply chain. The expectation is that we’re reaching down to another tier of our supply chain and guaranteeing that good ESG practices are in place.

Sargent: Incorporating an ESG framework from the earliest conversations about investment preferences and risk tolerance allows us to allocate capital in the most clear and transparent way on behalf of our clients. It gives us a common language

Water, cooler.

That’s

©2021 Elkay Manufacturing coMpany

The Smartwell® Beverage Dispenser Enjoy sparkling or still water. Add natural fruit flavors and sweetener, as well as electrolytes, vitamin C and caffeine. All without cans or plastic bottles.

Elkay.com/smartwell

most successful companies are able to differentiate themselves from their competition by embracing diversity and fostering an inclusive workplace where all individuals feel welcome and valued.

It’s critical that companies examine how internal business practices and activities can accommodate and amplify different voices and life experiences.

DeMento: Our firm casts a broad net when recruiting for open positions.

We typically work with one or more search firms, emphasizing our desire for a diverse candidate pool and our involvement in Diversity Lab’s Mansfield Rule program. Through our affiliations with organizations committed to inclusion in the legal profession—affinity bar organizations, the Chicago Committee and the Coalition of Women’s Initiatives in Law—we also identify candidates from underrepresented groups. To mitigate the effect of unconscious biases on our attorneys, we’ve implemented a competency-based system for associate progression—identifying partners to oversee the equitable distribution of assignments among associates, and providing targeted opportunities and training to attorneys throughout their careers. DEI is also a standing agenda item at every executive committee meeting and is addressed at firm meetings and through regular firm programming.

Hamilton: To ensure the success of DEI, senior leaders—and most notably the CEO—must be on board, visible and vocal about it, putting success metrics in place and reporting on them quarterly. For example, they should look to increase diverse hiring by measuring how many diverse candidates are being recruited and presented to hiring managers, and how many diverse hires they’re making. It’s important to measure your diversity of talent and put a strategy in place to reduce gaps. We’re not perfect, but this past year has shown us all that we’re living in an imperfect world. At Elkay,

made aware of the policies in place.

Regular training intervals should be established to remind people of ESGrelated laws, the company’s policies and how these align with its cultural expectations and values. Having some mechanism for formally recording employees’ acknowledgment of those policies—rather than just ‘checking the box”—also helps send home the message that this is a serious business expectation.

Sargent: Turning a plan into action takes persistence, patience and responsiveness. At Chicago Capital we benefit from being a small company where conversations about not only what we’re doing but also how we’re doing it can happen spontaneously and without judgement.

We invest in companies that focus on transparency—organizations that make their expectations of employees clear and transparent, while allowing ample opportunities for feedback and adjustment. These are steps that companies can take to see their governance policies acted out day to day.

How can organizations drive improvements via ESG performance?

Hamilton: What gets measured gets changed, which means the most important thing a company can do is establish formal targets for those ESG levers that their stakeholders care about. They should then make sure their employees know about the new targets, which will help ensure that people take an ESG-minded approach to their jobs and reporting on their achievements. Organizations can accomplish this by linking their ESG targets to the business’s overall strategic scorecard, or making ESG targets part of every leader’s performance goals.

Either way, it’s important to set clear improvement targets, then make it clear that everyone is responsible for meeting their individual sustainability, social impact and governance expectations.

SPONSORED CONTENT Sargent: Good performance with regards to ESG goals can fall victim to shifting definitions of what’s “sustainable” and what it means to be “good.” When it comes to our investment decisions, we look for companies and operators with longterm, durable visions that we believe will accrue outsized benefits to all stakeholders. When a business sets its goals with long-term, positive outcomes in mind for its customers, employees, shareholders and the broader public, they’re at once making decisions with a mind toward economic value and sustainability.

How important is tracking and validating ESG data—and how is it best accomplished?

Sargent: Analysis is only as good as the data; however, tracking and validating ESG data can be a tall order given the incentives that companies have to produce short-term results.

One approach is to collect data through market-based incentives and targets, like the cap-and-trade programs currently working to reduce greenhouse gas emissions in several U.S. states.

This type of approach encourages businesses to collect and track the relevant data, while also imposing a cost on the environmental damage that results from their business. In the end, customers will decide what’s important to them and businesses will respond.

Hamilton: Reporting is critical to improving the ESG matters your stakeholders care about. At Elkay, a cross-functional team works on ESG. Through stakeholder research, they determine what ESG issues matter to employees, customers and shareholders.

Because the issues change over time—for example, as DEI becomes more important to stakeholders—the research should be cyclical. Once we know what stakeholders care about, the team measures our current standing, sets targets and determines how we’ll measure progress. Typically, the business functions closest to specific metrics are responsible for reporting on them. This year, we began using the model of the robust and systematic Global Reporting Initiative—an international independent standards organization that helps businesses, governments and other organizations understand and communicate their impacts on issues such as climate change, human rights and corruption.

The team learned a lot about getting the organization aligned through this effort.

We’re now finalizing the report and will undoubtedly refine our tracking and reporting methods based on these learnings. For public companies seeking funding through investment partners that track ESG, third-party auditing may be recommended.

Over the last few years, have attitudes about the value of ESG changed?

DeMento: Absolutely. When I started practicing law, there was an almostsingular focus on the bottom line, and only a niche group of companies and

investors were interested in issues like sustainability and social impact.

Now ESG is a buzzword in marketing and pitch materials everywhere. We regularly see potential investors asking funds for their ESG policies before they commit capital, and funds will often require portfolio companies to adopt policies and provide reporting metrics in these areas as a condition to investing. Trade organizations are responding in kind, and some, like the National Venture Capital Association, are developing model policies and procedures for use by their members.

Companies also seem increasingly willing to engage on ESG issues.

The pandemic and social unrest of the last year have helped bring this into focus, as many business leaders have reacted publicly to the upheaval with frank discussions about racial inequality and public health in a way that would have been hard to imagine a few years ago.

Sargent: As a consumer, I’m more aware of the sustainability of the companies I interact with regularly and where I spend my money. I believe that more broadly as a society, we’ve come to realize the detrimental effects of short-term thinking, as well as the enormity of the challenge ahead of us to attain durable and long-lasting sustainability in private sector business practices across all sectors.

Hamilton: Attitudes about ESG have definitely shifted over the past few years. You see this change in everything from statements about climate change in the recent Crain’s roundtable to the changing purpose and role of corporations in our society to the elevated expectations of employees and consumers, who increasingly prefer to do business with companies doing good in the world. Companies that ignore these shifts in societal expectations do so at their peril.

What’s the future outlook for ESG, including for investors seeking above-benchmark returns?

DeMento: ESG investing seems here to stay in one form or another.

Demand for socially responsible investments continues to increase, and prominent institutional investors are leading the charge. A push by the current administration for “green” investments and technologies and other policy changes could help spur further investment in these areas.

At the same time, compliance costs and disclosure obligations are likely to increase as regulatory oversight increases. The SEC, for example, recently announced its focus on climate-related disclosures and even created a climate and ESG task force to identify ESG-related misconduct.

The push for more disclosure is also likely to come from investors who desire better metrics to help them quantify and evaluate the return on ESG initiatives.

Hamilton: I predict that ESG will continue to be a springboard

“TURNING A PLAN INTO ACTION TAKES PERSISTENCE, PATIENCE AND RESPONSIVENESS.” — STACEY SARGENT, CHICAGO CAPITAL

ABOUT THE PANELISTS CRISTINA DEMENTO is a partner in the corporate and securities practice group at Neal Gerber Eisenberg, one of the largest single-office law firms in the nation. She focuses on complex business transactions, including mergers and acquisitions, equity investments, venture capital and private equity transactions, restructurings and joint ventures. A graduate of Duke University and New York University School of Law, she has been selected by her peers for inclusion in The Best Lawyers in America and is recognized by The Legal 500 for Middle Market M&A. She also co-chairs the firm’s Women’s Network Leadership Initiative.

TED HAMILTON is president of Elkay Plumbing, a division of Elkay Manufacturing Co., a Downers Grove-based, 101-year-old manufacturing firm with more than 3,000 employees and 17 locations worldwide. A shareholder and fifth generation member of Elkay’s founding family, he joined the company in 1992 working in increasingly responsible positions before assuming his current role in 2017.

He holds a bachelor’s degree from Valparaiso University, an MBA from DePaul University and has completed the Executive Development Program at Northwestern’s Kellogg School of Management.

STACEY SARGENT is a partner at Chicago Capital, an SEC-Registered Investment Advisor founded on the principle of putting clients first. She co-founded the firm in 2018 after working in the investment business since 1995. Previously, she held management and administrative roles with William Blair, Olde Discount Brokerage and Howe Barnes. She has a bachelor’s degree from Northern Illinois University and is a Chartered Financial Analyst (CFA) and a Certified Financial Planner (CFP). She is a member of the CFA Society of Chicago.

for business success—both from a commercial standpoint and with respect to recruiting. Companies will need to perform well and tell their ESG success stories to attract and retain the best talent. In addition, business returns will follow ESG performance as consumer expectations and the

reporting demands of the investment community continue to focus on evidence-based ESG reporting.

Sargent: In our opinion, this is one of the most important points about ESG investing. Unlocking hidden value from ESG is something we’re keen on.

Consequently, finding companies that are strong operators but that may not necessarily be recognized for their ESG practices—due to their size, or inability to broadcast their sustainability record—are ideal investments for our clients who hope to harvest the sustainability dividend.