Is ESG good for business?

ESG investing has become more than just a minor trend. In Australia alone, 87 per cent of institutional investors (i.e. huge super funds that can sway entire industry policy) say their decision making about where and how to invest is strongly impacted by environmental, social and governance (ESG) factors.  

As Roger Urwin, co-founder of the Thinking Ahead Institute, told The New Daily: “These big asset owners control the world’s most influential capital and hold great responsibility and growing influence in relation to their beneficiaries.” 

Those beneficiaries are, basically, companies. Which is why ESG isn’t just some vague corporate buzzword anymore. It’s rapidly becoming the de facto way of doing business. Bloomberg predicts that global ESG assets might top $50 trillion by 2025. If your company isn’t ESG-compliant, that’s a big pile of money you’ll likely never see.  

  

What is ESG?

 

ESG stands for environmental, social and governance. You’ll hear it a lot in investment circles, but it’s really a framework for conscious, environmentally friendly consumerism. ESG is an organisation-wide approach that helps companies operate more sustainably, more ethically, more transparently, and with greater accountability to their stakeholders. In other words: better. And this goes way beyond installing some solar panels on the roof. 

  

What are the benefits of ESG?  

 

The most obvious one, and one that perhaps doesn’t get talked about enough, is that ESG is good for the environment, and for people. Companies with a solid ESG policy have a vastly reduced carbon footprint. They use ethical labour and promote internal diversity. They’re more compliant, too, with strong governance across the board. 

But is ESG good for business? That’s the big question. Operating responsibly is usually seen as a burden, financially speaking, rather than a benefit. But there’s a growing bank of evidence to suggest that that’s no longer the case. 

Here's why ESG is simply good business. 

  

Top line growth 

 

This is the big one: does ESG make the little red line go up? These days, the answers is a resounding yes. In a 2019 McKinsey report, analysts found that a strong ESG position attracted more B2B and B2C customers. It also gave companies better access to resources, through stronger community and government relations. Businesses with weak ESG struggled to attract new consumers, or retain their existing customer base. They also achieved far lower valuations than their ESG-compliant competitors. It’s a simple, unavoidable truth in 2023: customers are willing to pay to “go green”. More than that, they will actively avoid brands with weak ESG positions.  

  

Cost reductions 

 

This is another paradoxical benefit of ESG. How can operating more sustainably reduce costs? Shouldn’t it be the other way around? Well, not really. By switching to renewable energy providers, eliminating waste, streamlining their supply chain and reducing reliance on raw materials, businesses can boost operating profits by as much as 60 per cent, according to McKinsey. 3M is a great example. The company has saved $2.2 billion since introducing its “pollution prevention pays” (3Ps) program in 1975, simply by switching up their manufacturing process and re-using production waste. FedEx is another one: by converting even 20 per cent of their 35,000-strong vehicle fleet, the company reduced fuel consumption by more than 50 million gallons.  

  

Government relations 

 

The ‘G’ in ESG refers to governance, which is a highly undervalued corporate virtue. Not only does strong governance help a business run smoothly, it also gives companies greater strategic freedom by easing regulatory pressure and engendering more government support. McKinsey analysts found that one third of all corporate profits are at risk from state intervention. In other words, by operating more responsibly, businesses can avoid a lot of red tape. In 2020, for example, Nestle announced it would invest up to $2.1 billion by 2025 to transition away from plastic wrappers. This is not only great for the environment, but it also slashed Neslte’s compliance costs, especially in regions that crack down hard on plastic packaging.  

  

Attract investors 

 

Public concerns about climate change and responsible business have forced institutional investment funds to change their strategy, with the vast majority now building their portfolios around ESG principles. The trend is growing at a healthy 12 per cent each year (which doesn’t sounds like much, but literally represents trillions of dollars washing through the global economy). It’s a good reminder that everything comes back to consumer demand. Customers not only want to shop with ESG-compliant brands, they want their money used responsibly too. And if it’s not, they’ll take it elsewhere. For business owners looking to attract outside investment, the choice is clear: adopt ESG, or slowly lose relevance and market share.  

  

Customer loyalty

  

In 2021, Accenture surveyed more than 25,000 customers across 22 countries. 50 per cent of them said they had re-aligned their brand priorities as a result of the COVID-19 pandemic. Consumers were willing to pay a little more to support brands that aligned with their values. And as the average consumer becomes more socially conscious, and more concerned with the environment, the pressure is on businesses to evolve right alongside them. This is especially important when you consider the purchasing data behind old vs new customers. Not only does it cost more to acquire a new customer than keep an old one, you’re less likely to get a sale, too. Studies have shown that while companies have a 5-20 per cent chance of converting a new customer, for existing customers that number sits between 60 and 70 percent.  

  

Want to learn more about ESG, and how it can benefit your business? Check out RMIT Online’s Sustainability and Social Impact short course.