In today’s business landscape, Environmental, Social, and Governance (ESG) factors have emerged as key drivers of long-term value creation and sustainable growth for companies across industries
Beyond financial performance, stakeholders, across a number of industries and fields, increasingly scrutinise a company’s impact on the environment, its treatment of employees, and its commitment to ethical business practices. As a result, integrating ESG considerations into corporate strategies has become essential for businesses seeking to thrive in the modern era.
This article explores how embracing ESG principles can unlock value and deliver a competitive edge by attracting investors, enhancing brand reputation, mitigating risks, and fostering innovation and operational efficiency.
Key traits to consider when shaping an ESG strategy
When discussing sustainability and social governance, one has to consider the concept of the social license. According to most accepted definitions, a social license refers to the “ongoing acceptance of a company’s or industry’s standard business practises and operating procedures by its employees, stakeholders, and the general public.”
This is crucial for companies and other organisations in the public sphere to understand and integrate into their strategy and operational model.
According to the most recent ESG survey by global management consulting firm McKinsey & Company, which considered the responses of more than 1,100 participants from more than 90 countries, over 90 per cent of companies reported that such matters are on their agenda.
Moreover, organisations reported that they are actively implementing meaningful ESG changes with tangible benefits. The survey also revealed that more than two-thirds of respondents reported that their ESG efforts had a significant impact on their organisations in the past three years, while 43 per cent stated that they have seen financial gains from their ESG investments during this period.
These findings indicate that the impact of ESG is diverse and may require time to fully realise. For instance, a third of respondents noted that their organisations’ focus on ESG positively influenced employee commitment, leading to improved retention rates, highlighting how ESG can reinforce both value and values within a company.
Notably, survey respondents, who indicated that their organisations managed to achieve both financial value and broader impact from ESG initiatives, something which McKinsey refers to as “ESG momentum,” identified seven key organisational traits.
“First, their organisations approach ESG from a growth perspective,” McKinsey reported, noting that “the organisation’s priorities exceed merely conforming to industry standards or regulatory requirements and aim toward unlocking new opportunities.”
The second trait related to how organisations “strive to connect with external stakeholders and to be accountable to them,” creating a mutually beneficial relationship that fosters a responsible, diligent approach to ESG.
What is more, organisations said that they identify specific stakeholder priorities for which they are “uniquely placed to excel,” explaining that their organisations strive to make these priorities a core part of their business strategy.
McKinsey also explained that another trait includes the appointment of a C-suite executive in a position of authority, allowing them to work with the chief executive officer in shaping and implementing ESG initiatives.
“Organisations build a central ESG team, which is not the same as building a large team,” McKinsey stated. “Respondents also say their organisations bring together talent from across the organisation to help meet ESG goals,” it added.
In addition, organisations make considered efforts to embed purpose into multiple aspects of their business, as well as linking ESG metrics to compensation, using key performance indicators (KPIs) to gauge progress on ESG objectives.
“All told, survey respondents who identify their organisations as leading in ESG see their efforts as a means of both protecting and creating value,” the company stressed.
ESG funds grow; approach may become more targeted
In another piece of analysis by industry experts Lucy Pérez, Dame Vivian Hunt, Hamid Samandari, Robin Nuttall, and Krysta Biniek, it noted that “the rising profile of ESG has also been plainly evident in investments.”
According to the latest figures, inflows into sustainable funds increased from $5 billion in 2018 to more than $50 billion in 2020, and then to nearly $70 billion in 2021.
Additionally, these funds gained $87 billion of net new money in the first quarter of 2022, followed by $33 billion in the second quarter. By the first half of 2022, global sustainable assets were estimated to have reached approximately $2.5 trillion.
Indeed, in July of this year, Masdar, a renewable energy company based in Abu Dhabi, enlisted the services of banks to organise its first-ever sale of green bonds.
This move reflects a growing trend among hydrocarbon-rich Gulf issuers who are seeking to enhance their environmental credentials by venturing into green bonds and other sustainability-linked debt instruments.
One interesting part of the aforementioned analysis, is that recent geopolitical events, which have turned previously laid-out plans upside down, may alter some organisations’ approach to ESG, without, however, stopping it altogether. It is expected to make it more tangible, targeted and meaningful.
“It is also likely that patience for what may be called performative ESG, as opposed to what may be called true ESG, will likely wear thin,” the analysts explained.
“True ESG is consistent with a judicious, well-considered strategy that advances a company’s purpose and business model,” they added.
Measuring ESG and creating useful intelligence
Another key aspect of an organisation’s ESG strategy relates to how it is measured. An analysis by advisory firm EY showed that to ensure consistency and comparability in sustainability metrics for all stakeholders, a reliable ESG framework must rest on four core pillars.
These include scientific measurement and baseline establishment, continuous benchmarking and analytics for early warning signals, performance improvement to boost revenue and optimise costs, and effective communication of outcomes to all stakeholders.
EY also highlighted the importance of data, which plays a dual role “as both a telescope and a microscope” for informed business decisions.
According to the firm, there are three primary data models, which include enterprise data covering core business functions, third-party data across the supply chain, and external data from the surrounding environment, such as consumer sentiment, investor inputs, and sector benchmarking, providing valuable intelligence for organisations.
“Third-party and external intelligence is key to differentiating an enterprise’s ESG transformation journey,” EY stated.
ESG is linked to robust financial performance
Finally, it should be noted that there is a misconception surrounding ESG, namely that it is a waste of resources for the companies and organisations who implement it.
However, according to a study from Bain & Company and EcoVadis, which was released in April of this year, ESG activities correlate to stronger financial performance.
The study, titled “Do ESG Efforts Create Value?” looked into how ESG activities and outcomes have affected 100,000 companies, 80 per cent of which are private firms.
“Our findings provide much-needed perspective in the debate as to whether ESG activities correlate with financial performance,” advisory partner at Bain & Company Axel Seemann stated.
“This new data shows that positive ESG outcomes are a trait of successful companies,” he added. Moreover, Seemann said that “this should encourage private companies and investors to confidently double down on ESG efforts,” noting that “we only expect this correlation to strengthen as ESG data becomes richer and more nuanced.”
Among the study’s findings was that companies with greater female representation in their executive teams tend to achieve better financial results. Secondly, renewable energy usage is linked to higher EBITDA margins in carbon-intensive industries such as natural resources, transportation, and industrial goods.
Thirdly, businesses that prioritise ethics, environmental responsibility, and labour practices in their supply chains tend to be more profitable. Lastly, companies recognised as ESG leaders experience higher employee satisfaction, leading to faster growth and increased profitability.