Despite the growing regulatory demand upon businesses requiring sustainable practices and reporting, companies should not view adopting an Environmental, Social and Corporate Governance (ESG)-centric approach as an imposition. Indeed, not only has this type of multi-stakeholder approach to planning and reporting already been integral to strategy development for some large corporations for decades, it is likely to be key to future commercial success, thanks to its ability to create value in five key ways, namely; improved product appeal, reduced costs, reduced regulatory interventions, improved talent retention and productivity, and optimized resource allocation.
Benefit 1 – Improved Product Appeal
Conscious consumerism is on the rise, and ESG criteria are increasingly driving consumers’ brand choices. According to research, 87% of American consumers will purchase products from companies that advocate for issues which are important to them, and younger generations are more likely to research a company’s social contributions. As such, focusing on ESG factors and criteria should be a key priority for companies (see NorthC for example) looking to send a strong message to their socially-conscious customer bases and ultimately, build engagement with their products and brands and drive top-line growth.
Benefit 2 – Cost Reduction
ESG-themed costs – such as energy, water, waste consumption, absenteeism, and staff turnover – can affect operating profits by as much as 60%. One example of a company that has achieved sustainable cost reductions and savings through a focus on sustainability is 3M, which has saved $2.2 billion since 1975 with its Pollution Prevention Pays (3P) program.
Benefit 3 – Regulatory Compliance
Pursuing ESG best practice and reporting is now a legal requirement for many companies and so essential in satisfying perhaps the most important stakeholder in any commercial endeavor, namely regulators. However, beyond any mandates, an ESG framework – by bringing risk management to the forefront of the strategic decision-making process – should help companies identify, measure, and monitor the risks they face in the course of business operations, helping to avoid those ‘black swan’ events that can destroy corporate reputations and lead to regulatory penalties, such as fines.
Benefit 4 – Talent Retention and Improved Productivity
As Millennials and Gen Z become the dominant demographic in the workforce, Corporate Social Responsibility (CSR) and good corporate citizenship are playing an increasing role in talent attraction and retention. Indeed, research already shows a strong correlation between companies with high ESG scores and employee satisfaction and attractiveness – a trend expected to increase in the years to come.
Of course, the presence of talent within an organization does not guarantee better outcomes for productivity, and thus, companies must embrace practices which can extract value from the talent which they possess. Fortunately, adhering to ESG frameworks can also help lift the productivity levels of their existing workforces. A recent study has shown a strong link between ESG and labor productivity, which researchers expect will become more positive as ESG reporting frameworks standardize over time.
Benefit 5 – Optimized Resource Allocation
ESG frameworks can enhance future returns on investment by encouraging companies to allocate capital for the long term. For example, companies that use ESG criteria as a basis for decision-making in the due diligence phase can avoid making investments which may be rendered obsolete in the future by regulatory changes or environmental issues. Such an approach to investment and asset allocation will ultimately help companies to avoid stranded assets (those which are unable to earn their original economic return) in the future.
As the regulatory environment continues to demand more from the business community, ESG as a whole is a concept with which organizational leaders will have to grapple with at one point or another and ESG will most likely become a major (if not THE) organizing principle in all corporate decision-making processes. This should not be a source of concern, as an ESG-centric approach to strategic planning and business operations should ultimately offer multiple benefits to companies and prepare them for an ESG-driven future.
At HFX, we help train business managers to understand the strategic importance of sustainable management, including the specific impact and benefits of certifications through our simulations, Strategic Eco-Manager and Healthcare Hero. If you are interested in learning more, please contact us today.