5 ESG benefits for businesses
ESG is a framework for conscious consumerism. It helps businesses attract investors, build customer loyalty, improve financial performance and make business operations sustainable.
Investors are hopping on the ESG train, while a pandemic, concerns over climate change, cyber incidents, global supply issues, economic gaps and social justice movements have become catalysts for spiking adoption rates.
Environmental, social and governance (ESG) is a framework for conscious consumerism that is gaining immense popularity in the business world. But it's not a new phenomenon. Rather, it's a continuation of socially responsible investing that has gone mainstream. The term ESG officially originated in 2004 with the publication of the UN Global Compact Initiative's "Who Cares Wins" report.
Socially conscious investors and stakeholders -- including employees, board members, customers, regulators, suppliers and distributors -- want to know a company's stance on socioeconomic factors and its sustainability efforts before investing.
While passing the investor test and setting up a successful ESG plan may seem challenging for any business, a well-conceived ESG strategy can help.
What is an ESG strategy?
An ESG strategy is an organization-wide approach that tweaks a company's environmental, social and governance practices to make it more sustainable. Now more than ever, the success and growth of a business are directly tied to a solid ESG strategy. According to Bloomberg Intelligence, global ESG assets may surpass $50 trillion by 2025.
ESG is sometimes referred to as sustainable investing, which involves conducting business that provides long-term value without producing any negative effects on the environment or society. A good ESG strategy includes sustainability factors -- such as a company's efforts toward reducing its carbon footprint, going green, encouraging diversity or introducing employee wellness programs. It also focuses on sustainability efforts that matter the most to a business and are the easiest to put into action. As such, an ESG strategy paves the way for a company to gain investor confidence, earn customer loyalty, reduce operating costs and improve both asset management and financial performance.
5 ESG benefits for businesses
Using the ESG framework can bring tangible benefits to both businesses and investors. For businesses, it opens a pool of capital and promotes a stronger brand identity, and investors can enjoy the low-risk investments associated with an ESG-centric brand.
Here are five benefits of ESG for businesses:
1. ESG offers a competitive advantage
Companies participating in ESG are gaining a competitive advantage. A recent GreenPrint survey concluded that 64% of Americans are willing to spend extra money to buy from businesses that promote sustainable products.
ESG metrics are also important to consumers, employees, lenders and regulators. Company leaders who make efforts to improve labor conditions, promote diversity, give back to the community and take a stand on socioeconomic issues play a major role in strengthening a company's brand.
2. Attracts investors and lenders
The inclusion of ESG reporting in earnings reports is trending among businesses. Investors and lenders are becoming highly attracted to organizations that invest in ESG and use ESG disclosures to shed light on their sustainability efforts. A recent Gallup study found that 48% of investors are interested in sustainable investing funds.
Public concerns caused by the pandemic, climate change and misuse of natural resources are forcing lenders to shift their lenses toward sustainable businesses and weed out the ones with outdated practices -- such as unfair wages, investments in fossil fuels, unsustainable agriculture methods and the manufacturing of nonrecyclable products. By providing a comprehensive view of their practices, businesses offering sustainable investing in ESG can influence a lender's decision to pick a contender that offers a sustainable future with a low risk profile.
3. Improves financial performance
ESG not only makes a business favorable to lenders, but it can also improve the overall financial performance of a business. Even small efforts toward sustainability -- such as going paperless, recycling, or making energy-efficient upgrades -- can improve a business's bottom line and ROI.
To keep up with ESG programs, companies must track key metrics -- such as energy consumption, raw material usage and waste treatment -- which eventually lead to reduced energy bills and cost reductions. Companies that stay compliant with ESG have less exposure to fines, risks and penalties, which positively affects their bottom line.
In 2020, Nestlé announced it would invest up to $2.1 billion by 2025 to transition from plastic to food-grade and recycled plastics. This shift is expected to help Nestlé reduce its carbon footprint and cut compliance costs -- especially in regions where there are stricter laws against the use of plastic packaging.
4. Builds customer loyalty
In a 2021 survey conducted by Accenture of more than 25,000 consumers across 22 countries, 50% reported that they have realigned their priorities when shopping for brands as a result of the COVID-19 pandemic. These consumers are willing to pay extra for brands that are aligned with their values and are more loyal to those that treat people well. Today's socially conscious consumers want to know what the businesses they support are doing for the greater good.
Companies that adhere to ESG principles can retain and attract more customers by being transparent and effectively communicating their ESG efforts to customers.
5. Makes company operations sustainable
Companies investing in ESG can sustain and adapt to an ever-changing landscape. While ESG is only mandatory for publicly traded companies in some jurisdictions, it seems to be heading in that direction for the rest of the corporate world, too. Companies that choose to overlook ESG policies now might have to deal with them later, in the form of legal, regulatory, reputational and compliance issues.
Businesses that properly integrate ESG principles into their core identify cost-saving opportunities and enjoy low energy consumption, reduced resource waste and an overall reduction in operational costs.
Is ESG for businesses of all sizes?
Sometimes, SMBs assume that their lack of resources can be a hindrance to ESG adoption and that their ESG efforts won't pay off in the long run. However, investing in ESG -- even on a smaller scale -- can always have a positive effect on a business.
While larger organizations may have extra resources to set up ESG policies or form high-level sustainability partnerships, SMBs can attract sustainably conscious investors without going through the bureaucracy and red tape that larger organizations face. Smaller businesses -- such as local coffee shops and restaurants -- are also in closer proximity to their customers and have ample opportunities to share their sustainability stories and connect at a deeper level.
ESG for the long term
An effective ESG plan demonstrates a business's commitment to risk management, cost reduction and care for the environment. It also indicates that a business has a strong stance on socioeconomic issues -- including customer satisfaction, labor standards, social injustice and sustainable investments -- and is willing to proactively evolve with the changing market.
However, with all its positives, ESG has also faced some market and political backlash as some critics believe that ESG investing isn't capable of producing the real-world results that it promises. However, that doesn't seem to slow down the ESG adoption rates and solid returns of ESG investments. ESG funds brought lower volatility and solid returns on equity in 2021, and many of these funds have also shown above-average longevity, according to Morningstar index data.