ESG: Six Reasons Why Companies Are Doing It
STORY INLINE POST
Companies worldwide are integrating Environmental, Social and Governance (ESG) principles into their business strategies. In Mexico and Latin America, we tend to see implementation being carried out in response to corporate requisites. Public companies of local origin have also begun deep diving into critical strategies and reporting based on pressure from financial institutions and from their competitors. However, organizations of all sizes are also getting involved in this critical yet complex journey to manage investor, consumer, and NGO expectations.
Here are the six reasons why companies are embracing ESG and why your organization needs to relate these business principles to corporate decision-making as you look to the future.
- Top-line growth: By adopting ESG principles, consumers develop a greater preference to a product or service, increasing revenue in a sustainable manner. It also allows organizations to dive more effectively into new markets and expand in current ones. The NYU publication “ESG and Financial Performance” mentions that after analyzing over 1,000 studies published between 2015-2020, they concluded a positive correlation between ESG and financial performance for 58 percent of the corporate studies concentrating on operational metrics. In turn, company valuation is driven upward. According to S&P Global Market Intelligence data, over 50 percent of the ESG-linked funds outperformed the S&P 500 in Q1 2021. They tracked the price change for 27 ESG exchange-traded funds and mutual funds with over $250 million in assets under management and in seven months, almost 60 percent performed better than the S&P 500. So, if you’re looking for sustainable long-term value creation and improved financial performance, ESG is proving to be a valuable strategy.
- Bottom-line growth: ESG implementation also produces cost efficiencies due to the new adoption of best practices. Sometimes, there are competitive RFPs carried out to evaluate alternatives; at other times, there is a more profound due diligence of suppliers. For example, companies adding renewable energy to their portfolio in Mexico could save from 10-28 percent against the regulated tariff. Waste management strategies, raw-material optimization, energy, and water efficiency are all actions that should produce a decrease in operating expenses. In fact, McKinsey research has found that efficiencies produced by ESG can affect operating profits by as much as 60 percent. This bottom-line growth can be utilized for development opportunities, R&D, new product creation, payment of dividends, and others, which can in turn multiply the benefit and investor confidence.
- Access to capital: Financial institutions are running due-diligence processes on organizations requesting access to capital. Financing conditions are becoming more attractive for organizations focusing their investments and efforts on ensuring long-term value creation. Therefore, good ESG business plans can enhance performance, reduce risk and ensure greater stakeholder well-being, which means higher credit ratings and better loan conditions. Today, public companies are being regulated by growing ESG trend compliance and companies emitting green and sustainability bonds are designing, implementing, and reporting on strategies that guarantee their compliance. Applying ESG principles attracts investors. A PwC survey mentions that 80 percent of the interviewees consider ESG as an important factor in their investment decision-making, while 75 percent believe that companies should concentrate their expenditures on ESG issues that are applicable to their business, despite the possible negative impact on short-term profitability. In addition, about 50 percent said that they would consider divesting from companies that didn’t take sufficient action on ESG issues.
- Reputational advantage: Clients, employees, investors, and governments are demanding more responsible practices. Companies that adopt ESG principles gain a better reputation than those that don’t. All stakeholders are impacted by an ESG approach, and therefore tend to create stronger relationships with communities, investors, employees, and the general public. This, in turn, can protect one’s brand and provide organizations a competitive advantage that drives risk downward and reaps economic benefits.
- Regulatory compliance:Governments have national and local carbon reduction goals. They need support from the private sector, especially manufacturing, transportation, and the energy industries because of their effects on the environment. In many countries, regulations have been developed on a federal and local level to address compliance on upcoming trends that help achieve government goals. Thus, organizations that adopt ESG principles and follow best practices will ensure a better relationship with elected officials, have greater access to subsidies and secure a reduced risk of costs imposed by carbon-tariffs when exporting goods.
- Employee motivation: Employee attraction, retention, motivation, and performance have been directly linked to successful ESG implementation, especially among young professionals. Promoting diversity, including gender, race, beliefs and age, has proven to create greater value in leadership and work teams. Linking sustainability goals to compensation strategies for senior management also drives change and value creation in a top-down approach. Working for a responsible company that embraces ESG and reports their metrics will improve employee morale, which drives performance and, therefore, positive shareholder returns.
Many businesses focus on short-term cash investment return. However, the true approach lies in the creation of long-term sustainable value by doing good, and embedding ESG principles into your business planning process. As PwC describes it, “it’s about creating a tangible, practical plan that achieves real results.” Proving an organization’s commitment to the broad range of stakeholders’ priorities, produces long-term benefits that, in turn, drive success and market leadership.