In recent years, “ESG” has become a ubiquitous term in corporate America. However, ESG is not a new concept and has been around for decades. Examples of ESG-based policies can be found in stakeholders’ actions associated with the civil rights movement in ‘60s, the Vietnam War in the ‘70s, and the anti-apartheid movement in South Africa in the ‘80s. The ‘90s saw the establishment of the United Nations (UN) Framework Convention on Climate Change, and the modern iteration of ESG-based policies can be traced to the UN Global Compact (Compact) in 2000. The Compact encouraged businesses to adopt and report on their sustainable and socially responsible policies. 

ESG policies have continued to evolve and take shape since the Compact, and this article responds to five essential ESG questions that franchise companies should consider when developing their ESG policies:


What is ESG?

ESG is an acronym that is comprised of the following components that affect businesses: environmental, social, and governance. At its core, ESG is an investment strategy where an investor’s decision to invest in a company revolves around whether the company’s policies and practices on environmental, social, and/or governance issues align with the values of the investor. Unlike non-franchise companies, franchise companies must account for the sentiments of not only their current and prospective investors but also current and prospective franchisees since franchisees are making an investment into their franchise brand. 


What are some of the benefits associated with ESG? 

Benefits of ESG for franchise companies include: (1) improved corporate governance systems that help identify and address short-term and long-term sustainability issues as well as help companies satisfy their fiduciary duty of oversight; (2) a more inclusive and comprehensive decision-making process, which will lead to stronger relationships and buy-in from material stakeholders like employees, customers, and franchisees; (3) mitigation of adverse sustainability issues like pollution, waste, pay equity, discriminatory labor practices, and lack of racial diversity; and (4) increased economic inclusiveness, which in turn could lead to franchisees gaining additional growth and market share. 


What are some of the challenges associated with ESG

Challenges of ESG for franchise companies include: (1) as with establishing and creating any company-wide policies, additional time and costs associated with implementing, monitoring, and measuring results of ESG-based policies and (2) navigating through the politicization of ESG issues, so franchise companies must be mindful and respectful of the perspectives and viewpoints of customers and franchisees. 


What standards should franchise companies consider in establishing ESG policies? 

In creating and implementing ESG policies, a franchise company should consider and prioritize a host of relevant business issues and questions, including whether it is a retail or non-retail concept, distribution and supply chain strategy, current and future geographical locations for the brand, and socio-economic backgrounds of company’s franchisees, employees, and customers. 


What are examples of companies that have ESG strategies? 

Below, we highlight the following franchise companies to provide some context on how they each address a specific component of ESG:  

  • Environmental McDonald’s Corporation operates and franchises quick service restaurants and has a robust ESG strategy that is summarized in its 2022-2023 Purpose & Impact Report. McDonald’s has identified three environmental categories within its ESG strategy: 1) climate action, 2) packaging, toys, and waste, and 3) nature, forests, and water. For climate action, McDonald’s is committed to reducing greenhouse gas emissions related to its restaurants and offices by 36% by 2030 and to achieve net zero emissions by 2050. McDonald’s is focusing on restaurant energy, supply chain, and packaging and waste to meet these goals. Under packaging, toys and waste, McDonald’s disclosed that it is accelerating waste reduction strategies and transitioning to more sustainable packaging and toy materials. McDonald’s is aiming for 100% certified, recycled, or renewable materials by the end of 2025. For nature, forests, and water, McDonald’s describes its commitment to sustainable food production and conserving forests through use of things like regenerative farming models, as well as water stewardship practices that are embedded in its sourcing requirements, such as responsible water use and disposal.
  • Social – Avis Budget Group (Avis) is in the business of renting automobiles to the public. In its 2023 ESG Report, Avis disclosed that they are committed to advancing diversity, equity, and inclusion within their workforce, consumer base, communities, and that they supply and promote a culture of shared values to strengthen relationships and create inclusive growth. Accordingly, Avis has established a Disadvantaged, Minority and Women Owned Business Enterprise (“M/WBE) Program to promote the growth and development of diversified suppliers and assure that M/WBEs have the maximum practicable opportunity to participate in Avis’s contract awards. Avis has also created four employee resource groups under its umbrella DE&I program using #PowerofDIFFERENT hashtag that advocates for equity, looks for opportunities for advancement, and facilitates discussions to promote a more equitable and inclusive workplace.
  • Governance – Planet Fitness Inc. (PF) is a fitness training concept. PF disclosed in its 2022 ESG Report that it focuses on strong governance and oversight, effective corporate policies, and rigorous compliance. PF has a Nominating and Corporate Governance Committee that oversees its ESG Strategy. In connection with such oversight, PF created a Corporate Social Responsibility team that meets regularly to review and discuss progress on the ESG strategy and provide updates to the Nominating and Governance Committee.

Investors, employees, consumers, and other material stakeholders are placing a growing value on ESG, and companies, including franchise brands, have responded by creating and implementing ESG-centric policies and programs. To be successful, ESG polices must be based on and prioritize a multitude of business and legal issues and concerns. As with moving forward with any corporate-wide strategy, there will be challenges associated with ESG, but if properly developed and updated, implemented, and monitored, ESG can assist franchise companies with improving their return-on-investment strategies, mitigating their sustainable risk profile, and increasing their franchisee and customer bases by appealing to issues and sentiments that resonate with their material stakeholders.  

Carlos White is an experienced Attorney with Lathrop GPM’s Franchise & Distribution Practice
Group, who helps clients create franchise programs and strategic distribution and licensing agreements, both domestically and internationally, across many business sectors.

Rachel L. O’Connor, an associate in Lathrop GPM’s Franchise & Distribution Practice Group.