The field on which companies compete on their environmental, social, and governance (ESG) performance is vast, making it all but impossible for any company to successfully excel across all areas. A bank, for example, is competing with other banks for ESG-conscious consumers, but it is also competing with other companies across industries for ESG-conscious talent. At the same time, many investors are allocating capital based on a firm’s ESG performance.
For many managers this is a new type of competition, one that often means competing across industries. And so, it is unsurprising that many of them often feel overwhelmed and under-equipped. Others, though, have found a way out. They are identifying spaces to thrive where competitors are absent. We call this a Green Ocean.
In much of our research we have explored the link between ESG and successful firm outcomes. Inspired by the idea of Blue Ocean Strategy, which pursues uncontested market space to create and capture demand, our Green Ocean Strategy helps find space away from competition where a company can excel in ESG. We have learned that companies can thrive in the Green Ocean by taking these three steps: Explore, Examine, and Execute.
The first step is to explore the ESG landscape to see where your competitor is weak. Find the ESG space(s) where your competitor is not reporting. Because most ESG reporting is voluntary, areas not reported on tend to be where a company is not able to compete.
One of the most helpful guides for exploration is simply your competitor’s sustainability report, which is almost always posted on its website. This report is free, and, in fact, most rating agencies use it as a primary source for their ratings. There are also fee-based commercial sources, such as rating agencies and aggregators, from which to obtain indepth information on a competitor’s ESG. However, these sources can be quite expensive and require long-term subscriptions of $50,000 to $100,000 (or more) annually. Many other less costly information sources are available, including government filings, web searches, non-governmental organizations, and niche providers (eg, Glassdoor).
To illustrate this first step, consider the CEO of Redde Payments, a payment processing company, whose primary competitor is Block, formerly Square Inc. We examined the companies’ performance using publicly available sources, both free and paid (eg, Bloomberg). We did this to illustrate how anyone — whether they are a professor of strategy, a company manager, or a competitor — can find Green Oceans.
We learned, from searching the website of the CDP — a not-for-profit that runs a global disclosure system for organizations’ and governments’ environmental impacts — that its system has identified a block as having historically poor environmental disclosure. This omission suggests that Block is historically weak in the dimension of environmental performance. Indeed, when we review Block’s 2020 and 2021 sustainability reports, we found that Block has only recently committed to reducing net emissions while it creates a new challenge by pursuing energy-intensive cryptocurrency. To the extent that Redde’s stakeholders care about environmental impact, this presents a potential opportunity for Redde.
The second step involves examining your own company’s core capabilities and resources. Find areas of ESG where your company has the resources to generate strong performance and where such ESG is an integral part of your company’s overall performance. This is your Green Ocean.
Returning to our Redde example, a payment company’s energy usage is integral to its operations, as it must consume large amounts of energy to transact, manage, and store payments. Thus, if Redde is responsibly sourcing its energy and limiting its carbon footprint, it has a meaningful opportunity to tout its synergistic environmental performance.
In contrast, if Redde was making large contributions to help indigenous people in New Guinea with food security, although a great cause, it would not clearly link to its core operations; even if this was an area in which Block made no efforts, this would not be considered a Green Ocean.
It is essential to also find that space where your competitor is not performing. For example, assume Redde discovered 15% of its programmers — a core part of its operations — were of Hispanic or Latino ethnicity compared to the national average of about 7%. Although Redde would be, technically, outperforming on diversity, this would not be a Green Ocean space if, hypothetically, 20% of Block’s programmers are Hispanic/Latino. So, even though Redde’s performance in this ESG category is strong and to its core operations, it is linked directly competing with Block’s stellar performance. This point reminds us that even if your company excels in a particular aspect and that aspect is linked to your core operations, it is still not a Green Ocean if your competitor excels at it as well.
Once you have found a Green Ocean, you have to sail there. To execute effectively, you not only have to perform well on the ESG goal, but also effectively communicate this performance to your stakeholders. After all, it is impossible to grow and improve your reputation if your most important stakeholders don’t know about your achievements.
If a company has already identified a Green Ocean, the next step is to identify key stakeholders. Ask: Who in this company does this issue matter to? In the case of energy usage, it could be the company’s engineers. But it could also be customers, and others.
Next, pinpoint how you can reach those stakeholders. Options include marketing emails, internal reporting through company announcements, and well-placed press releases.
Finally, don’t stop with a single announcement. Consistently highlighting your ESG accomplishments to create momentum and build reputation is important, as consistent exposure is necessary to secure mental shelf space.
The Competition for ESG Success
For those companies with stakeholders that care about ESG, Green Ocean strategy is the ideal way to compete in the new and important arena of ESG performance. The manager who can find an ESG space where their competitor is absent and yet they can excel, execute upon it, and then effectively communicate that performance to their stakeholders, will help ensure the ESG success of their company.