Senior Managing Director and Partner and Social Impact Global Lead
Is ESG good or bad for business? There’s an intense debate today over the answer to that question, but at BCG we think that framing the issue in those narrow terms is too simplistic. We firmly believe that when done right—that is, when driving material societal impact that reinforces a business’s advantage—ESG is a powerful positive force for both the organization that strives to advance it and the world in which we live.
CEOs frequently say that they want to leave as their legacy a thriving, growing business that has a positive impact on society. And we see more and more evidence of organizations persistently pushing for actions that benefit both the world and their own organizations. These companies are socially transformative businesses primed for long-term growth.
CEOs aren’t the only people who care. Employees want to work for companies that make a difference, and they want to play a role in delivering that contribution. Members of the Millennial and Gen Z generations—a demographic that sees corporate purpose as one of the most important factors to consider when choosing where to work—make up a growing percentage of the workforce.
Investors are increasingly aware of the value creation potential of companies that generate positive change, and the effect of this heightened interest is clear. Companies that achieve meaningful progress on ESG factors earn higher valuation multiples and have a lower cost of capital, while customers prefer to direct their money toward brands they feel good about.
Of course, when launched the wrong way, without the required transformational leadership and sustained focus, strategies aimed at social impact can distract the organization, endanger brands’ reputations with customers and employees, waste investments, and reduce shareholder returns. But research shows that when companies invest appropriately in sustainability issues that are material to their business, they can enhance shareholder returns by up to 5%. In contrast, when investments are pro forma or immaterial, returns can go down by as much as 2%.
So how can companies get it right? What enables a business to become socially transformative, increasing its own long-term prosperity even as it reaches beyond itself to positively impact society?
Becoming a socially transformative business is not an exercise in bulking up a company’s corporate social responsibility (CSR) muscle. The CSR approach relegates societal efforts—often pro bono—to localized results. Unless such efforts are integrated in the broader business agenda, their potential impact for society and for the organization will be inherently limited.
Instead, it’s important to figure out how the company can make a meaningful contribution that also drives the business. Doing so means following the same strategic rules that apply elsewhere in the organization and address the same key questions:
In addition to answering those fundamental questions, leaders must choose the right social impact business model, looking for meaningful opportunities along the entire value chain—whether striving for a more inclusive organization, seeking a more inclusive supply chain, or driving social impact through the business itself. There’s an approach for every sector and for every company’s unique position, as the following examples illustrate:
Along the way, socially transformative businesses position themselves for sustainable growth. Recent BCG research into the potential societal influence of banks shows that they can create value in multiple ways. For example, the market for global social and sustainably linked bonds has tripled since 2019. And banks that expand lending to creditworthy women- and minority-led small businesses are gaining visibility with a rapidly growing segment of the market.
Socially transformative companies are better able to attract and retain talent, too. We’ve seen this at work at BCG, where the retention rate among staff who have participated in social impact projects is twice as high as the rate among those who have not.
To make a difference internally, the company’s pursuit of social impact must be authentic—not just a marketing campaign. For starters, the effort should align with the company’s articulated purpose, which will help attract support from employees, customers, investors, and communities. That stated purpose should reflect the broader impact that the company can offer to the world.
Substance—in the form of bold ambitions, tangible actions, and transparent progress—is the true test of authenticity. And becoming an authentic socially transformative business may require a shift in mindset—from compliance to contribution, from obligation within the company’s four walls to opportunity for the business and society throughout the value chain. The social impact that organizations choose to pursue should be bold and material, focusing on areas where they can make the most difference while strengthening their own longevity and ability to grow.
Business leaders and their employees want to do good. But in taking bold social impact action, they shouldn’t be shy about capturing the full business value of their efforts. The benefits of authentic impact can come through more dedicated and productive suppliers and employees, new customer markets, better community and government relations, and higher shareholder returns. In all of these cases, the ability to tell the story well is critical.
The company should articulate its impact approach in a manner that connects the journey to the corporate purpose. By using the brand to tell a compelling, provocative story of a brighter future, the company brings all stakeholders along for the ride and strengthens its likelihood of success.
A large part of this endeavor involves clear and candid communication from leaders about corporate commitments, societal contributions, and progress. Unduly enthusiastic claims may come across as social-washing, which, like greenwashing, refers to a perceived disconnect between promises and action. Companies can best serve their interests by providing a straightforward account of the work in progress, the goals reached, and the efforts that lie ahead.
Companies need to rigorously manage and measure key KPIs—not just of the end impact, but also of the integration of socially transformative priorities throughout the core business, in key decision-making processes, and in the culture. Most companies that currently measure such progress use qualitative rather than quantitative KPIs. It’s important to shift toward an analytics-based approach to define baseline, targets, and results related to social impact efforts.
Spurred by pressure from stakeholders to increase their positive impact on the world, many businesses have recently gained traction on the environmental component of ESG, setting and working toward climate and sustainability goals. But global crises and economic uncertainties over the past several years have increased awareness of the urgent need for social change.
It isn’t easy to address this challenge in a way that satisfies stakeholders’ disparate needs, but pioneering companies are paving the way, making a difference at scale and strengthening their business while helping society. The trust and recognition they build as they progress will give them the license to operate in new markets and improve their brand’s reputation overall.
With innovation comes the potential for profitable solutions, and with profit—even small gains—comes the potential for scale and speed. Socially transformative business is smart business, a foundational approach that nurtures resilience and long-term advantage.