In the past, sustainability may primarily have been looked upon as a way to manage reputational risk. But in recent years, these objectives have become inadequate and somewhat outdated. The expectation to conduct business sustainably by integrating ESG (Environmental, Social and Governance) objectives into the business model has more or less become mainstream and is considered a hygiene factor for modern companies. But for the aware business-owner, ESG is also an opportunity for brand enhancement, attracting talent and customers, and streamlining the business model.
Environmental, social and governance (ESG) issues should be a top concern of corporate management and boards. There was a time when a public stance on ESG issues was a public relations tactic. However, in today’s rapidly changing business climate, attention to ESG issues is becoming critical to long-term competitive success. Nearly 70 percent of business leaders today acknowledge that ESG is essential or good for business as a value proposition. This is in line with rising expectations from investors, consumers and other stakeholders.
First of all – what is ESG?
ESG stands for Environment, Social and Governance: these are the three main areas representing the pillars of a sustainable investment. Companies are evaluated by investors using ESG criteria to rate the quality of investment and determine the associated risks.
- Environment factors refer to the company’s behaviour on environmental issues such as resource depletion, climate change, waste and pollution.
- Social factors are related to the company’s treatment regarding people, employees and local communities, including health and safety issues.
- Governance factors refer to corporate policies and governance, including tax strategy, corruption, structure, remuneration.
In sustainability strategies, we see a company’s understanding of how they can best use their products and services to help society achieve a more sustainable future, or perhaps do their part to impact the UN Sustainable Development Goals. ESG refers to how the same company manages itself in three dimensions – Environmental, Social and Governance. Sustainability initiatives may be part of a company’s ESG efforts, but they more often than not don’t comprise all of them. Importantly however, ESG references how a company manages and maximizes its own non-financial risk.
ESG is good for your company’s bottom line
ESG requires a shift in mindset: ESG must be considered as an investment, rather than a cost. As Larry Fink from BlackRock states in his 2019 letter to CEOs, “Profits are in no way inconsistent with purpose – in fact, profits and purpose are inextricably linked.” In fact, companies who have incorporated ESG matters into their strategy have gained several benefits, including increased market trust and value for shareholders.
- ESG initiatives can unlock competitive value
Companies that recognize the importance of adapting to changing socio-economic and environmental conditions are better able to identify strategic opportunities and meet competitive challenges. Proactive and integrated ESG policies can widen a company’s competitive moat relative to other industry players.
- A proactive stance on ESG issues can keep activists at bay
Activists have used governance weaknesses as a tool in proxy contests and campaigns against companies for years, but increasingly they are targeting management teams and boards that fail to take a proactive stance on potential environmental or social issues .Companies that proactively address ESG issues can set the bar for the entire industry and at the same time help immunize themselves against activist intervention.
- Targeting tomorrow’s consumers
Consumer behaviour is changing rapidly and while customers used to look at big, established brands as guarantors for quality, small businesses and local products is the new black. Customers – Millennials (born between 1981 and 1996) in particular – tend to turn to local brands with an interesting story and strong ideals. Consumption has become more value-reflecting than ever before. In 2019, nearly one-third of the world’s population belonged to Generation Z (born between 1997 and 2012), a target group that prioritizes social justice, action against climate change, and who let their individuality shape their purchasing behaviour. Consumption will be driven more by personal values than the inherent value of the product or service purchased. “Business as usual” belongs to the past. The customers of tomorrow are likely to hold companies accountable for their environmental and social impact and expect businesses to ’walk the talk’ contribute positively.
- Attracting talent
Another important aspect to consider is how ESG can attract talent. Having a clear sustainability agenda generates internal pride. We all want to work for companies we feel proud of being associated with. Millennials, in particular, want to work for companies committed to values and ethics. According to the 2016 Cone Communications Millennial CSR Study.1, 64% of Millennials consider a company’s CSR (Corporate Social Responsibility) commitments when looking at potential employers, and the same percentage would not accept a job if the company had not got strong CSR practices. Apart from employee engagement having a significant impact on corporate reputation, a company whose employees are able to contribute positively to social or environmental issues finds itself with more loyal employees, according to Cone’s study.
To realise the full benefit of a proactive stance on ESG issues, it’s important to adhere to some best practices for benchmarking and strengthening the company’s ESG program to increase the return on investment of the company’s sustainability initiatives by
- Developing a purposeful culture for ESG
- Articulating the value proposition of ESG
- Integrating ESG into the business with effective board oversight
- Effectively communicating with stakeholders
- Building capacity around ESG issues
ESG is here to stay
Companies’ failure or success in achieving ESG goals affects everyone. Consumers, employees, governments, citizens, and investors all have a stake as crises multiply. Companies can help solve looming global problems while creating value for shareholders, if they and investors embed sustainability into the core of their business strategy and track, properly monetize, and report the intangible and tangible benefits of ESG investments. Those that don’t are avoiding their responsibility to respond to pressing social issues and they may be failing to perform their fiduciary duty. They may even be headed toward extinction as their customers abandon them for firms that not only have a strategy for facing the future, but act upon it.