The value of ESG
7 July 2021
As company stakeholders ranging from investors, customers and employees through to government bodies increasingly direct attention towards sustainable and socially responsible practices, the demand for ESG strategies grows ever more critical.
What is ESG?
ESG is a concept adapted from the “Triple Bottom Line” ideology, that recommends a focus upon three distinct aspects for a holistic increase in business productivity:
1. Environment
The E refers to the environmental impact of a company. It concerns how companies use energy, manage their carbon footprint, as well as the efforts they are adapting to contribute towards sustainability.
2. Social
The S refers to the social impact of a company. It outlines corporate culture, relationships with various stakeholders, and the extent to which a company values inclusivity and diversity. This aspect predominantly stems from the values upheld by a company that guide their decisions and behaviours.
3. Governance
The G refers to the governance of a company. While this aspect examines the internal system of controls, practices and procedures of a company to ensure effective and accountable decision making; it also addresses how companies maintain transparency to ensure they meet industry best practices, mitigate violations and liaise with regulators.
What value can ESG strategies provide?
1. Top-line growth
Strong ESG practices are shown to significantly contribute towards increased investment, revenue and sales achieved by corporations. From an investment perspective, individual and institutional investors are increasingly allocating resources to corporations that place an emphasis on sustainable governance and operational practices.
A Bloomberg report corroborates this, estimating ESG assets will reach an astounding $53 trillion by 2025, and represent more than a third of total assets under management.
ESG strategies have also proven to significantly drive consumer preferences. A study conducted by global management consultancy firm Mckinsey and Co. found that 70 per cent of consumers surveyed on their purchase behaviours, across a variety of industries including electronics, building, automotive and packaging categories, said they would be willing to pay an additional five per cent for a responsibly produced product if it met equal performance standards as a non-green alternative.
2. Reduction of operating costs
Businesses that implement effective ESG practices can offset rising operational expenses through the addition of long-term efficiencies. 3M, the multinational conglomerate, is a testament to this.
The company has publicly stated they have managed to save approximately $2.2 billion in costs since introducing their “pollution prevention pays” program.
These savings were derived from practices directed at the prevention of pollution through the reformulation of products, improvement of manufacturing processes, redesign of equipment and production waste reduction through recycling. 3M is now widely regarded as a leader in ESG strategy integration.
3. Mitigation of regulatory and legal interventions
Recent studies have found that competitive ESG strategies help reduce companies’ risk of adverse government action, allowing them to achieve greater strategic freedom. This contribution is unquestionably significant, especially when considering that on average, one-third of corporate profits are at risk from state intervention.
4. Attract and retain top talent
Implementing a strong ESG strategy can provide your company with a competitive advantage over other employers. A 2021 Mercer study found that top performing employers were shown to have significantly higher ESG scores than their peers.
According to the study, companies that achieved high employee satisfaction and attractiveness to talent scores were also shown to have had in place strong frameworks to support their approach to environmental, social and governance related issues.
The positive impact of a competitive ESG strategy towards talent attraction and retention will only grow in the coming years. As the presence of the Millenial and Gen Z generations increases within the global workforce, so will the demand for companies to consider ESG.
This demographic places a greater emphasis on environmental and social concerns, and they will expect more from employers on these issues.
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