In this article we view ESG as an emerging factor that is predicted to enhance business value
Every business, whether consciously or unconsciously, is already immersed in the three concepts of ESG: Environmental, Social, and Governance. While many companies are already actively looking to enhance their ESG alignment, many remain resistant to change, fearing acute and long-term derailment when it comes to profit and business growth. However, the fact that Millennials and ESG investing is a growing trend and regulations are increasingly calling for more ESG adherence means that it’s something that every business should take seriously. Transitioning into a more ethical business isn’t something to fear – in fact, many analysts suggest that ESG has the capacity to enhance business value.
Understanding ESG Value Dynamics
In a more ethically-driven world, understanding and implementing ESG is likely to become a key driver of value:
Environmental: The Environmental aspect of ESG focuses primarily on the energy efficiency and environmental impact of a business. ESG aligned businesses will therefore explicitly analyse their carbon footprint and potential impact on climate change.
Social: The Social element of ESG relates to a company’s interaction with other businesses, customers and those in its local and global community, both on- and offline. Socially responsible brands are increasingly focused on diversity and inclusion.
Governance: The Governance factor of ESG defines the need for businesses to resonate with governments, authorities, and regulations, yielding efficient processes that creates a valuable business, while meeting the expectations of investors.
Knitting ESG Together to Enhance Business Value
The most successful businesses of the future will create an interactive harmony, between Environment, Social and Governance. In 2019, the US Business Roundtable issued guidance that businesses have a responsibility to serve customers, workers, suppliers, communities and investors with integrity – something that is being increasingly demanded by each of these groups and is supported by data:
- Global sustainable investment is over $30 trillion (68% increase since 2014)
- Millennial investors are twice as likely to invest in ESG funds
- ESG analysis is currently valued at just over $10.4-trillion
Never before have companies had so much media, investor, B2B, and consumer focus on them, in terms of their social impact and integrity. Crucially, embracing ESG is likely to go way beyond a sense of moral righteousness – research suggests it may add value and longevity to savvy businesses, facilitating better ROI, gains in equity, reduced loan rates, and enhance credit scores.
ESG & Enhancing Business Value Creation: How to Get it Right
While it’s easy to provide businesses with a mantra of ‘ESG will enhance businesses value’, providing viable real-world examples is the key to understanding why it really could increase profits, growth, and longevity in the next 10-20 years and beyond. The core financial benefits of ESG can be split into five distinctive areas:
Front-end Business growth
Enhancing ESG alignment at the front end of a business can help to attract both B2B and B2C customers. Most notably, sustainable products and services are the keys to enhancing front-end business. As an example, a coffee brand could switch to greener and fair-trade products and benefit from a stronger community, B2B, and government interaction and resources. In contrast, failing to integrate ESG principles into a business (or worse still, doing the opposite), could turn customers and companies away from a brand, due to poor ethics, quality, and safety concerns (whether real or perceived). Increasingly, non-compliance with regulations may lead to business fines and potential shutdowns and closure.
By embracing ESG concepts, businesses can potentially reduce energy use (e.g. less water consumption, fuel, and packaging waste) and also look to technology for ethical alternatives that save money. In contrast, maintaining old methods, or not consciously trying to reduce consumption of utilities (such as water), may lead to higher running costs and increased expenditure on packaging and waste disposal fees. In the future, tighter regulations may also lead to potential fines and the imposition of business restrictions.
By enhancing alignment with the government and legal regulations, businesses can save money and resources, when it comes to processing regulatory and legal issues. The adoption of ESG compliance will increase the prospects of gaining subsidies, government support, and contracts – while avoiding the risks of fines, penalties, restrictions and the risk of closure.
Creating a diverse, fair and socially responsible workforce is likely to enhance employee motivation, loyalty, and productivity. Adopting a strong ESG ideology may help attract a strong talent pool, as opposed to an unconscious company that are increasingly at risk of alienating potential employees via poor social credibility.
Conscious capital investment
By auditing current processes, businesses can potentially invest in economically smart technology, equipment, processes, and outsourcing. Looking at sustainable options is the way of the future, and it comes with economic benefits that negate the risk of being left behind competitors.
ESG may seem daunting for some businesses – but its adoption can enhance business value while ensuring a successful and sustainable future.