Our guest today, Lisa Costello graduated from MIT with an undergrad in mechanical engineering and then went on to get her MBA from the Rice Executive Program.  She's the President and Owner of M&H Consulting Ltd and today is going to help define ESG and how getting it right can help you to better grow and scale your business.

Learn More Earn More Business Growth Podcast

Host: Brian Webb

Guest: Lisa Costello

Episode 35: Understanding ESG & How Getting It Right Can Help You To Better Grow & Scale Your Business

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M&H Consulting

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TRANSCRIPT 

Brian Webb:

Hey, everyone. Welcome to the show today, it's always fun to be with you here and I want to introduce our guest today. Let me tell you some fun facts about her. One, she's the mother of four daughters, one of them a doctor, the other an attorney, the other, a physical therapist, and the other one is an architect. She is a multi-engine and instrument-rated pilot, but that's just the fun stuff. Let me tell you about the stuff that's relevant to this interview today. She graduated from MIT, the Massachusetts Institute of Technology with an undergrad in mechanical engineering. And if that's not enough, she goes on to get her MBA from the Rice Executive Program.

She's the president and owner of M N H Consulting Ltd. I consider her a friend and she's also a member of the WBNC and the SASB Alliance. So you're probably picking up, Lisa is rarely not going to be the smartest person in the room. She's a very successful business leader and what she's going to talk about today is ESG. What is ESG? I know what it is. You might think you know what it is, but Lisa is going to bring some really, really good insights as to what it is, why it's important, why you should report about it, who benefits and who the stakeholders are. Let's jump into our interview with Lisa Costello, you're going to love her. You know, Lisa, you and I have had the opportunity, in fact, that's how I got to know you is through a mutual client that we're working with. And so, first of all, I just want to say welcome to the podcast today.

Lisa Costello:

Thank you. I appreciate the opportunity.

Brian Webb:

Yeah. So I've told the audience who you are. I know we're going to talk about ESG and I have a feeling, it's just a feeling I have, this is not data-driven, but I would imagine a percentage probably knows that E stands for environmental S stands for social and G stands for governance. But I know it wasn't until recently on this mutual initiative that we're working on and learning from you where I started to really understand or begin an understanding of what that is. So I would love for you to share with the audience, what is ESG? What does that mean?

Lisa Costello:

It does stand for environmental, social, and governance. It also can be interchangeably used with the term sustainability, which is protecting the resources we are... Using what we have in a way that we protect them for the generations that follow us, reduce, reuse, repurpose, that kind of stuff. But so going back to ESG, and one of the things that came up in our meeting when we first met was a lot of people think ESG is environmental, and it's all about climate change. And it's not, the social and the governance aspects are things that people don't typically think about, may not be well-defined, but have an impact on how a company is managed and the ESG framework allows investors, stakeholders in a company to see how a company is managed. It's the intangible stuff that doesn't show up on traditional financial statements. How you manage the resources, how you reuse them, a lot of that impacts your cost structure, your operating structure, the governance, are you using your employees well? Are you treating them well? Are they healthy? Are they happy? Are they productive?

It's hard to define but once you start thinking about the things that may not have been mentioned before, but they are kind of lying underneath the surface, it does make a lot of sense.

Brian Webb:

Let me ask you this. I think I could come up with a reason or two, why I think this is important, but what would you say is the most significant reason or why ESG is important in business today?

Lisa Costello:

It's that part of the company, but again that's not reported on the traditional financial statements. So there are companies... So there's the enterprise value of a company and what some of the standard-setting agencies are seeing is that there's a decline in the ratio of the enterprise value to the assets of the company, which means that there's some assets that the company has that isn't being reported, whether it's goodwill or again, how you're benchmarked with your peers, is there an opportunity? A lot of it revolves around risk, but they also don't... A lot of people don't think about opportunities. Maybe you have the secret sauce in how you deal with your employees or how they interact with each other or how you manage your company and that's an opportunity for you to create a competitive advantage with your competitors.

Brian Webb:

So talk about reporting sustainability, why report sustainability?

Lisa Costello:

A lot of investors and a lot of this revolves around the investing community right now. It's been around for about 10 years. So it's not new, but the standards are being developed, there's some alignment between some of the agencies. Some of them are more environmental, human capital, and then the other stuff you report it because you want your investors to know that you're thinking about these things. There may be room for improvement, but you're at least thinking about the things that matter to your company, that aren't warehouses and inventory and leases and that kind of stuff.

Brian Webb:

Who would you say benefits when a company becomes more sustainable-minded, focusing more on ESG and reporting on it? Who would you say benefits from this?

Lisa Costello:

I would say all of the stakeholders of a company and starting with the employees. If you're reporting on sustainability, you're already thinking about it and you've got a plan. So the employees benefit, it's a more stable company. Typically, they have... The management is better, management benefits, the investors benefit because there's transparency now. A lot of the stuff that's reported in a sustainability report are things that people would have kept secret before because they thought everyone in the public didn't need to know about it. But now with being transparent, it makes it easier for the investors to determine how risky the investment is. There are a number of different stakeholders that will look at a sustainability report and one of the challenges of writing a report is do you write a report that's targeted to one audience, or do you write a report that's targeted to everybody? Because you only want to do it once a year.

And a lot of the criticisms of sustainability reports are that they're too long, there's too much information. And that's because companies don't want to put out four different reports, one for the investors, one for the employees. So there's a lot of information in them, but they're important because specifically with investors, it's about cost of capital, de-risking the company, and being transparent. They know where the risks and opportunities are, they can benchmark them against your competitors or against an industry standard. And they can also see how you're improving or maybe not improving year after year, what you said you were going to do. And there are different rating agencies and they have different metrics and so some of them surprisingly are very quantitative and you can see how you're improving year over year.

Brian Webb:

I saw in the news that Tesla in May actually became a constituent of the S&P 500 ESG Index. So that's what I was going to ask kind of next was who determines what your ESG score is and what is a good ESG score? What does that metric look like?

Lisa Costello:

The real answer is right now, there isn't anybody that... Well, I take that back. There are rating agencies that will give you an ESG score. Their metrics are proprietary and they don't... So they'll take a sustainability report that a company will produce and they will score it. If you're a member of that company or if you're a member of that ESG committee or something the rating agencies will discuss with you how they got to your score, but generally, their formula is proprietary.

Brian Webb:

Yeah. Kind of like the credit bureau bureaus what you're telling me basically.

Lisa Costello:

Exactly. There's an ESG [inaudible 00:08:01] and there about four of them that now have enough traction that they're like the four best well-known. So the short answer is I don't know how they come up with their scores-

Brian Webb:

Because it's proprietary. Yeah.

Lisa Costello:

... because it's proprietary, but you can also look... I mean, they have industry benchmarks going with some of the SASB standards, they have industry benchmarks that you can use their metrics and see where you stand with regards to the industry that you're in.

Brian Webb:

That makes sense.

Lisa Costello:

Or also your competitors sometimes publish those metrics and you can see how you compare or benchmark with your competitors.

Brian Webb:

One of the things that you taught me in collaboration with this client that we both get to work with is that prior to knowing you and not being an ESG professional, I would have thought that E would have been the capital letter of social and governance. But one of the things that you taught and again to our mutual client is that really the governance is the bottom of the pyramid or the foundation. Talk about that for a second because again, prior to knowing you, I think ESG, I think environment, I think sustainability. And so I would have thought that the E the environment would have been the foundation, but one of the things that you taught me was that really it's the governance that is the foundation. Talk about that for a minute.

Lisa Costello:

So governance is, how is the company run? How are the people that run the company? What is their oversight? Who oversees them? Who monitors them? And what are the rules? And I don't want to say regulations because that's too strong of a word. But what are their processes and procedures that allow them to run a good company or run an honest company with integrity and transparency? So when you're talking about governance, you're talking about the management team, you're talking about the board, you're talking about outside auditors who might vet and rubber stamp the financial statements, you're talking about executive compensation. And so that's the governance and so when you're talking about governance, you're talking about the base of the pyramid, the foundation of a company, and from the board and the management team and the auditors, you drive your culture, your company culture, so to speak.

And that flows up into your social, which is how do you treat your employees? How do you treat the community that you live in? How do you treat the people that you work with outside of your employees? Your vendors, your customers. And then on top is the E. So if you do your governance correctly, your social sits on top of that and a good government makes good social easy. When you're doing a good social program that kind of almost by default rolls up into the environment because you're taking care of the people that you work with and treating your community with the respect that it deserves so that it's there for the seventh generation follower.

Brian Webb:

You said something earlier about the cost of capital. I think this is going to be the lynchpin question here today because I would imagine our audience is thinking ESG, this is a business growth podcast, what does one have to do with the other, which it really does have a lot to do with it. But more and more VC and investors are using ESG ratings as a metric for whether they do give capital or not, right?

Lisa Costello:

Correct. And one thing that came out of 2020 and the COVID is that companies with good ESG scores tended to do better during the pandemic in the stock market.

Brian Webb:

Interesting.

Lisa Costello:

They had good ESG scores and it all goes back into that governance issue. They had good ASG scores, they had good governance, their management team were sharp and focused, forward-looking and they have stable companies going into that. In a way that companies that weren't... Okay, I wasn't reporting ESG. So you still could have a good company, but it makes it easier. You're already thinking about it, you're proving that you're thinking about it and there's a structure for the governance in the ESG world that it's already there, it's very easy to do and when you report on it to investors, they're more comfortable because they know they can take out the risk that they've written in for what if there's a hurricane.

You're reporting on your environmental, your climate disasters, your water usage. Is there a risk there? Are you using too much or are you going to have a issue with storms? Where's your real estate? Are you in the Southern part of the United States where you potentially could... We're looking at in the next couple of days you could be dealing with a tropical storm. So investors, the more information they have, the easier it is for them to be comfortable with giving you money and that translates into a lower cost of capital.

Brian Webb:

That makes sense, Lisa. So thanks for breaking this down a little bit. I think you brought some insight and some clarity as to what ESG is, why it's important. And again, it really can impact your ability to fund or to raise capital for your business to fund growth. If our audience wants to learn more about you and the services that your company provides in terms of consulting, where's the best place for them to find you.

Lisa Costello:

They can find me on LinkedIn and they can also find my company on our website at M N H Consulting, www.mhcfirm.com.

Brian Webb:

Mhcfirm.com and we'll put that in the show notes too. Well. Good. Well, thank you, Lisa, for being on the show today. Thanks for bringing us your insight and your experience and your wisdom. Been a tremendous guest, we appreciate you being here today.

Lisa Costello:

Thank you. Bye.

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