Environmental, social, and governance (ESG) insights have been steadily growing more prominent over the past handful of years. It wasn’t until 2022, however, that the importance of ESG standards to business success became highly discussed across different fields and industries. Today, many businesses are implementing their own ESG strategies, focusing primarily on human capital management as well as ethical and environmental issues. But does ESG really have an impact on businesses?
In this article, we will take a closer look at why ESG is here to stay.
Does ESG Matter?
ESG framework matters because it helps businesses build companies that align with their values and with the investments they are making. This includes ethical values, as well as social and environmental values, both of which are becoming hot topics with consumers. You don’t have to take our word for it, either.
According to a recent survey conducted by Ernst & Young LLP (EY) across a selection of Fortune 1000 companies, even C-Suite executives are jumping on board. EY found that 87% of the executives surveyed felt that ESG initiatives are either extremely important (49% of respondents) or very important (38%). The remaining 13% felt that this kind of framework was either somewhat or slightly important. Notably, none of the respondents felt that ESG strategies were not important at all.
PwC’s recent Global Investor Survey (2022) found that investors feel similarly to executives, with data security and privacy ranking third among investor’s top priorities for businesses (51% of respondents), corporate governance ranking fourth (49%), and greenhouse gas emissions ranking fifth (44%).
It’s clear that ESG matters to C-Suite executives and investors alike, but why? How do these strategies create value for businesses? There are multiple reasons ESG standards are becoming a main focus in successful companies. According to a recent report from McKinsey (PDF), some of the most important among them include:
- Top-line growth
- Cost reductions
- Regulatory and legal interventions
- Productivity uplift
- Investment and asset optimization
From attracting both B2B and B2C customers (top-line growth) to enhancing returns through long-term sustainable investing (investment and asset optimization), ESG initiatives can help businesses thrive on a variety of different levels. That’s not to say that everyone is on board, however, or that there aren’t some people who question the importance of ESG. Luckily, we’re here to help you explain why ESG should be considered business savvy.
How is ESG Considered Business Savvy?
Let’s look at this from a practical standpoint. If you were a value-investor and had the option of investing in two companies, one that was selling something finite and the other that was selling something infinite, which would you buy and hold for 20 or 30 years? Even if the company selling a finite product may win a few years in the short-term, chances are in the longer-term that the company selling an infinite (or sustainable) product will win. If done properly, ESG is not about governments or regulators picking winners and losers for the world economy, but rather companies that are better positioned for the long-term gaining more investment and resources today.
Companies investing in their human capital have a longer-term talent strategy as well. It takes 20 years to build an employee with "20 years of experience." Although the business world is quite dynamic, companies investing in creating agile and persistent talent are likely to out-compete those who are catering to the least common denominator over the long-term.
That said, there are criticisms of ESG that are important to address in good faith. The primary criticism of ESG is that it is targeted at bringing politics into investing and governance rather than sound business principles. If one political party is seen as the beneficiary while the other is seen as on the losing end of making long-term changes in ESG, it is bound to become a "political football," rather than a substantive issue. Our intent is to show how ESG makes sense in a very practical, business-savvy, and non-political manner.
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Hurdles Faced to Proper ESG Adoption
Many executives are ready to invest in the proper implementation of comprehensive ESG frameworks and/or piecemeal initiatives. The goal is moving the ball forward, but this process is not without its challenges. There are a few hurdles you should keep in mind as you plan your own ESG adoption strategy.
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Investor Alignment
You may recall that many investors believe that ESG should be a top business priority. It is rarely the most important priority they see, however. That same PwC survey also found that 83% of the investors surveyed thought that developing innovative services, products, and operations should be the top priority in the businesses they support. The second-highest priority was reported as maintaining profits, with 69% of respondents weighing in. ESG initiatives might be important, in other words, but not as important as other things. That is why it’s important that ESG is pursued in a manner that is aligned to producing value to businesses, investors, and stakeholders over the short- and long-term.
Executive Consensus
Another hurdle executives face in the adoption of ESG standards is differences of opinion. Whether those differences in opinion include employees who don’t see the importance of ESG at all or those who simply don’t think it should be a top priority, resistance can slow down the objectives. Differences of opinion regarding what ESG initiatives to focus on can also limit the implementation of ESG frameworks. One of the best ways to handle this kind of objection is to analyze both the financial (PDF) and non-financial benefits of ESG, which might help put everyone on the same page.
ESG Analytics
One way to address investor alignment and executive consensus is ensuring that everyone is working with a common set of facts. A burgeoning field of ESG analytics is growing in an attempt to address this gap. As with any analytical endeavor, the devil is in the details of science, data, and analysis. In this case, there are a few challenges from conducting effective ESG analytics:
- Consistent reporting on ESG metrics by organizations
- Challenges to structuring ESG investments and changes
- Varying definitions of what is considered a "good" outcome of ESG, some of which are political in nature
To address these challenges, it’s important that data and reporting standards are determined and shared among all stakeholders. This will allow for accurate benchmarking and a common set of facts needed to address the challenges at hand. In the end, if the data shows the value of ESG in the long-term, which we think it will, then companies that adopt these strategies earlier are poised to out-compete those that are focused solely on the short-term.
ESG insights can help improve your business on several different levels. From improving cash flow to increased productivity, adopting ESG principles might be a pivotal choice for your business.
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