On this date in on May 20, 1873, the original patent on blue jeans was issued jointly to Levi Strauss and Jacob Davis. According to This Day in History, it was Davis and not Strauss who actually invented the blue jeans. He was a tailor in Reno, Nevada, and one of Levi Strauss’ regular customers. In 1872, he wrote a letter to Strauss about his method of making work pants with metal rivets on the stress points—at the corners of the pockets and the base of the button fly—to make them stronger. As Davis didn’t have the money for the necessary paperwork, he suggested that Strauss provide the funds and that the two men get the patent together. Strauss agreed enthusiastically, and the patent for “Improvement in Fastening Pocket-Openings” – the innovation that would produce blue jeans as we know them.
I cannot think of many pieces of clothing as ubiquitous and useful as jeans. Originally designed as working pants, in the 1960s they became a fashion statement and have continued to be so for the past 60 years. I thought about how important blue jeans are to fashion and culture in the context of ESG (Environmental Social Governance). ESG has become one of the hottest topics over the past few months. The Biden Administration and Securities and Exchange Commission (SEC) Chair Gary Gensler have made clear that ESG reporting will be a priority for corporations. This is a stark reversal from the prior administration which seemingly wanted to make ESG considerations illegal from the corporate perspective.
The SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement. The Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct and will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.
Not only is the SEC interested in ESG reporting but institutional investors have identified ESG as a key metric of organizations going forward as well. This makes how a company communicates about its ESG initiatives critical. One of the ways to do so is through the quarterly earnings call. A recent MIT Sloan Management Review article, entitled “How to Bring ESG Into the Quarterly Earnings Call”, by Brian Tomlinson, Tensie Whelan, and Kevin Eckerle had some interesting aspects that not only focus on the ESG issue but also compliance issues as well. The authors “believe that companies must integrate ESG wholly into their business strategies rather than relegating them to a sidebar. But we also recognize that it’s challenging for corporations to include more ESG information in quarterly earnings calls for a variety of reasons.” They go on to lay a process to do just so.
- Lay the groundwork. A key is that “participants are likely to receive ESG information more favorably if they have had prior encounters with ESG disclosure. Investors and management alike need a base level of comfort and confidence with ESG issues, and that kind of familiarity can be generated in several ways, beginning with consistently sharing sustainability data, usually in the form of an annual sustainability report.” The authors believe “key performance indicators (KPIs) on the most financially pertinent issues for the company, as well as the financial figures that link the company’s sustainability performance with its financial performance” are critical.
- Adapt the earnings call schedule. Management should develop “a smart plan for how to organize each quarterly call so that ESG matters are fully integrated.” One approach is to provide “quarterly updates on key ESG performance and ESG-driven financial measures, such as revenues from more sustainable products and services, improved retention rates, and operational efficiencies through waste reduction.” Another is to “focus the CEO segment of the call on a high-level view of corporate purpose and how the company builds value by engaging stakeholders on the most material ESG issues.”
- Report on — and fully explain — the return on ESG investment. Here the authors suggest an organization “set out the longer-term plan at the outset by explaining the substantive ESG issues the company is managing. Then report on the financial impact of ESG efforts, as appropriate.” Some examples are:
- Benchmark the retention rate against the rates at other companies in your sector.
- If your target reduced carbon emissions, report on energy savings associated with initiatives such as new manufacturing processes. In commercial real estate, greener buildings can command rent premiums.
- In the supply chain, disclose the reduction in supply chain disruptions caused by climate-related severe weather or drought, for example, and the revenues retained because your business can maintain continuous supply in the face of such events.
- Develop cross-functional collaborations. This is where compliance should have a large role as greater ESG-related disclosures often force functions within a company to work together. Your company can “codevelop content, such as a summary of the company’s materiality assessment and single-slide summaries of how the company is investing to grow value by addressing the most pertinent ESG issues.” The authors provide the example of “a logistics and transport company might report on its efforts to reduce greenhouse gas emissions and also save money through planning more energy-efficient routes and converting to electric vehicles.”
- Treat the earnings call as theater. An earnings call should be “a highly staged, tightly managed spectacle. The company and the analysts are key players in the drama. Consequently, if management teams are adding ESG as a strategy element, it’s important to enlist the help of analysts to shift part of the quarterly conversation toward longer-term ESG themes.” This is yet another area where the corporate compliance function should take the lead.
The authors conclude by stating, “The earnings call is an event. You want to involve the participants in a way that advances your ESG goals. That may mean orchestrating what happens to some degree — not with a deceptive aim, but to ensure that the ESG story is told in a way that informs and animates everyone who is present.” With both the regulators and your investor base watching your organization you should take the opportunity to move the ESG ball forward.
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