ESG is a framework for responsible consumption. It assists firms in attracting investors, fostering consumer loyalty, enhancing financial performance, and sustaining their operations.
Investors are boarding the ESG train, while a pandemic, concerns over climate change, cyber incidents, global supply challenges, economic inequalities, and social justice movements are driving up adoption rates.
Environmental, social, and governance (ESG) is an increasingly popular framework for conscientious consumerism in the business world. But this is not a new occurrence. Rather, it is a continuation of mainstream socially responsible investing. The term ESG was officially coined in 2004 with the publication of the "Who Cares Wins" report by the UN Global Compact Initiative.
Before investing, socially conscious investors and stakeholders, such as employees, board members, consumers, regulators, suppliers, and distributors, seek to know a company's position on socioeconomic concerns and its sustainability efforts.
Passing the investor test and establishing a successful ESG plan may appear difficult for any company, but a well-conceived ESG strategy can help.
An ESG strategy is an enterprise-wide approach that modifies the environmental, social, and governance policies of a business to make them more sustainable. Now, more than ever, a company's success and growth are intimately related to its ESG approach. Bloomberg Intelligence estimates that worldwide ESG assets may top $50 trillion by 2025.
ESG is sometimes referred to as sustainable investing, which is the practise of operating business in a manner that generates long-term value without negatively impacting the environment or society. A good ESG strategy incorporates sustainability issues, such as an organization's attempts to reduce its carbon footprint, go green, promote diversity, and implement employee health initiatives. It also focuses on the sustainability initiatives that are most important to a business and easiest to implement. As a result, an ESG strategy enables a company to acquire investor trust, earn customer loyalty, minimise operating expenses, and improve asset management and financial performance.
Advantages of ESG for businesses
Both firms and investors can derive substantial benefits from implementing the ESG approach. It creates a pool of cash for businesses and fosters a better brand identity, while investors can benefit from the low-risk investments associated with an ESG-centric brand.
Here are five business benefits of ESG:
ESG provides a competitive edge
Companies that participate in ESG gain a competitive edge. 64% of Americans, according to a recent GreenPrint survey, are willing to pay more to purchase from companies that promote sustainable products.
Consumers, employees, lenders, and regulators are also interested in ESG metrics. Leaders of a company that make efforts to improve labour conditions, encourage diversity, give back to the community, and take a stand on socioeconomic issues have a significant influence in bolstering the brand.
Attracts investors and creditors.
Incorporating ESG data into earnings reports is gaining popularity among organisations. Investors and lenders are increasingly drawn to businesses that invest in ESG and utilise ESG disclosures to shed light on their sustainability initiatives. According to a recent Gallup research, 48% of investors are interested in sustainable investment funds.
Public concerns caused by the pandemic, climate change, and mismanagement of natural resources are compelling lenders to shift their focus to sustainable businesses and eliminate those with outmoded practices, such as unfair wages, investments in fossil fuels, unsustainable agriculture methods, and the production of no recyclable products. By providing a thorough perspective of their processes, firms that offer sustainable investment in ESG can influence a lender's selection of a candidate with a low risk profile and a sustainable future.
Improves financial performance
ESG not only makes a company more attractive to lenders, but it may also improve a company's overall financial performance. Even modest sustainability actions, such as going paperless, recycling, or installing energy-efficient renovations, can enhance a company's bottom line and return on investment.
To remain compliant with ESG programmes, businesses must monitor important parameters, such as energy consumption, raw material usage, and waste treatment, which ultimately result in lower energy bills and cost savings. Compliance with ESG reduces a company's exposure to fines, risks, and penalties, which has a beneficial effect on the bottom line. Thus companies should mandate top and middle management to be updated with ESG norms or better ESG certified.
Nestlé will invest up to $2.1 billion by 2025 to transition from plastic to food-grade and recyclable polymers, as indicated in 2020. This change is anticipated to lower Nestlé's carbon impact and compliance expenses, particularly in places with tougher legislation prohibiting the use of plastic packaging.
Strengthens customer loyalty
As a result of the COVID-19 epidemic, fifty percent of respondents to a poll performed by Accenture in 2021 of more than 25,000 consumers from 22 nations stated that they have reordered their priorities when purchasing for brands. These consumers are willing to pay a premium for businesses that correspond with their beliefs and are more loyal to companies that treat their employees with respect. Socially conscious shoppers today want to know what their preferred companies are doing for the greater good.
By being upfront and successfully communicating their ESG efforts to customers, companies that adhere to ESG principles can retain and attract additional customers.
Contributes to the long-term viability of corporate operations
Companies that invest in ESG can endure and adapt to an ever-changing environment. While ESG is only mandated in certain jurisdictions for publicly traded corporations, it appears that the rest of the corporate world will soon follow suit. Companies that choose to disregard ESG policies now may face legal, regulatory, reputational, and compliance concerns in the future if they do so.
Businesses that appropriately integrate ESG concepts into their core identify cost-saving opportunities and benefit from low energy use, decreased resource waste, and a general decrease in operational costs.
Is ESG applicable to all business sizes?
Occasionally, SMBs believe that their lack of resources is an impediment to ESG adoption and that their ESG initiatives will not pay off over time. Nonetheless, engaging in ESG — even on a lesser scale — can always benefit a business.
SMBs can attract sustainably conscious investors without the bureaucracy and red tape required by larger firms to implement ESG policies or develop high-level sustainability collaborations. Smaller businesses, such as neighbourhood coffee shops and eateries, are also in closer proximity to their clients and have enough possibilities to share their sustainability stories and develop stronger connections.
ESG for the future
An effective ESG plan displays a company's dedication to risk management, cost reduction, and environmental stewardship. In addition, it implies that a company has a strong stance on socioeconomic concerns, such as customer happiness, labour standards, social injustice, and sustainable investments, and is willing to proactively adapt to the market's evolution.
Despite all of its virtues, ESG has experienced some market and political opposition from sceptics who feel that ESG investing is incapable of delivering the returns it promises. Despite this, the ESG adoption rates and excellent returns of ESG investments continue to rise. According to Morningstar index data, ESG funds offered decreased volatility and strong returns on equity in 2021, and many of these funds also demonstrated above-average longevity.