How are shareholders going to change advertising?

Advertising is on the verge of a major change, and for once we are not talking about cookies!

We are talking about the impact of Environmental Social Governance (ESG) reporting. This phrase investors will know all too well but might be new to many in advertising so let's get up to speed.

 

What is ESG?

ESG relates to the way companies manage their impact on the environment, society and governance – in other words, it's how they do business. From a company's point of view, this might include their treatment of employees, their stance on diversity and ethical conduct, as well as the headline-grabbing carbon goals. It is based on the United Nations' sustainable goals, including no poverty, zero hunger, good health and well-being, and many others.

The business case for caring ESG is clear - corporations perform better when they have a good ESG track record and over $59 trillion in assets (or 20% of all money invested into publically traded companies right now) is managed under some form of ESG or sustainability criteria. This number is only set to increase dramatically as the EU makes ESG reporting to be more comprehensive and mandatory for more companies over the next five years. By 2028 even SMEs will need to be reporting on how they manage their impact in the world, but the role out of ESG reporting has already started.

So to put it simply, ESG reporting will be mandatory for more companies. Better ESG is linked with better business success and allows access for significantly more capital to be invested.

 

How does ESG impact advertising?

The answer is as simple as it is impactful. ESG reporting includes the ESG of the companies in the supply chain, including the companies that advertising budget is spent with. Run a big campaign with a company with low ESG scores (like many major social networks), and this will negatively impact your own score! Therefore, advertising campaigns will soon impact share price by the sales being influenced and the impact on ESG scores. If future company earnings are negatively affected due to a decrease in ESG score, then even a well-meaning marketing campaign has the potential to do more damage than good.

The challenge advertisers face is that suppliers are not interchangeable. As walled gardens protect their audience, you must go through them regardless of their ESG score if you want to access their users. This limits the choice of the marketer to meet what might be contradictory performance and ESG targets, but there are options:

1) The most straightforward solution is to reallocate media away from low ESG suppliers towards higher-scoring ones. However, this may not be viable for some brands who have already reached saturation point on other channels or if other channels' ROI is below target.

2) The second option is to consider your campaign as a whole. Balance low ESG partners with bookings explicitly made for the higher ESG score. This way, the overall ESG impact is more positive.

3) The third is to use data overlays to improve or maintain performance while reducing direct spend on a supplier. Unlike in the past, when data was primarily used to optimise campaign targeting, it will become advantageous to get the same results but simply with a better ESG, and any improvement is a bonus.

In our opinion, most advertisers will need to do a mixture of all these strategies to get the most from their marketing budget in a sustainable way.

 

What is the action point for right now?

If the history of advertising has taught us anything, even with big shifts on the horizon, many will leave planning to the last minute - don't be that person!

Firstly understand when ESG reporting rules will start to be a concern for you, as the role out varies depending on your company's size, turnover and number of staff. You may already be under ESG reporting, or they may be on their way. Once you know when your obligations start, you can plan and make sure you are prepared for them. 

Once you are clear on when ESG will start impacting your company, we recommend getting planning tools that include ESG and data partners (like Thirty-One Circles) in place. Having both a planning tool and data partners selected will give you options that you wouldn't have otherwise and will make it easier for you to scale up quickly and without major disruptions to your campaigns. We would advise selecting partners and bringing them on board well ahead of ESG reporting so that you can maximise their value and test them before you “need” them.

 

In summary

ESG reporting will change how media planners and buyers plan campaigns in the future. The impact will vary depending on who you are working with, but advertising has always evolved over time, and it may be quicker to get your head around than people think. Understanding your suppliers' impacts is crucial, but don't wait until you need to make changes to start making plans. Understand your own timeline and get your partners ready to help.

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