More and more investors are choosing to invest their money in companies that operate ethically. They mainly look at ESG ratings. In other words, how a company performs in terms of Environmental (environment and climate), Social (society) and Governance (governance) factors. ESG assets are expected to comprise approximately one third of all global assets by 2025, more than three times as many as in 2015.
The popularity of sustainable investing is undoubtedly due to a new generation of investors taking responsibility for creating a better world. But idealism is only part of the story. Investing in ESG also yields a more than excellent return, because companies that score well on ESG often also perform better financially. Why is this and how can you as a company respond to this?
Why ESG creates financial value
The market value of companies that, in addition to profit maximization, also have an eye for their ESG performance, generally rises faster and fluctuates less than that of companies that are not (yet) involved in this. This seems contradictory, because isn’t it true that corporate social responsibility (CSR) costs money? That is certainly true, but it is even more true of the reverse. Irresponsible business costs even more, because of the risks it entails.
Think, for example, of Volkswagen, where they opted for cheating software instead of taking responsibility. They went bust in September 2015, after which the stock plummeted by 42% and the company lost $42.5 billion in two months. Now, six years later, Volkswagen has had to write off tens of billions to pay fines and the market value is still not back to its old level.
Or think of Deliveroo, the courier company that entered the London Stock Exchange on 31 March this year after years of stable growth, only to lose more than £2 billion in value in minutes. The main reason for the loss? Investors had serious doubts about the poor working conditions, the low wages and to what extent all this was actually legal. Moreover, because the margins in this market are small, it is even questionable whether Deliveroo can continue to exist when it is forced to pay couriers better and give better conditions.
Five ways ESG creates value
Specifically, there can be different ways in which investing in ESG leads to financial success. These all have to do with the fact that doing nothing brings risks, while doing something creates opportunities. For example, Witold Henisz, Tim Koller and Robin Nuttall of McKinsey list five ways ESG (and CSR in general) provides financial benefits to companies:
- Revenue growth
- Cost reduction
- Government support
- Higher productivity
- Less depreciation on investments
More and more consumers are opting for green and responsible products, and are willing to pay more for this. Think of electric cars and organic products. The same applies to companies and governments, for which socially responsible procurement is becoming increasingly important. So whoever your customers are, they will spend more with you if you have ESG in order.
By dealing more effectively with raw materials and energy, large costs can be saved in the long run. A simple example is making business premises more sustainable and installing solar panels. These investments continue to pay for themselves within five to ten years, thanks to significant savings on the gas bill (even if the gas price does not rise astronomically).
By proactively responding to social developments, you can count on government support, for example in the form of subsidies and obtaining permits earlier. If you don’t do this at all, you run the risk of getting caught (like Volkswagen) or having to change your entire business model (like Deliveroo).
Companies with good ESG ratings generally have more satisfied employees, especially when Social and Governance is in order. Satisfied employees are more motivated, perform better and also attract talent, which increases productivity. Dissatisfied employees, on the other hand, will not only perform less well, but can lead to major problems, for example through strikes or even lawsuits.
Less depreciation on investments
The latter is intimately intertwined with the three former ways. Sustainable investments (by definition) keep their value better, because the risk that they will quickly lose their value is many times smaller than with non-sustainable investments. For example, think of diesel-powered delivery vans. If you continue to invest in this now, you will repel customers (because they want electric), you will have more costs for maintenance, tax and fuel, and you will no longer be allowed to use it in the city. As a result, it will not be easy to get a good price for a few in a few years.
Implementing ESG in business operations
As should be clear, ESG is actually not that difficult at all, but mainly a matter of using common sense. The biggest mistake you can make in our opinion is to focus purely on achieving ‘check marks’ in order to get your ESG scores as good as possible. That may attract investors in the short term, but they also quickly left when they realize that the situation was not as rosy as it looked on paper. So do business in the spirit of ESG, not the letter.
In addition, be realistic and try to align ESG goals with existing business goals, strategy and corporate identity. Your focus also differs per sector. In the clothing industry there is much to be gained by taking a close look at the purchasing chain, while in the transport sector the focus could be more on making the fleet more sustainable or improving working conditions.
Would you like to know more about implementing ESG in your business operations and how Empact can help you make an impact? Take a look here, call +31(0)6-45770809 or send your email to email@example.com.