As ESG initiatives become more ingrained in corporate life, the methods to weigh the benefits and risks of such activities will have to come into sharper focus
Many individuals with expertise in environmental, social & governance (ESG) issues frequently assert that investors and senior executives are increasingly viewing ESG through both the risk reduction and opportunity lens. Indeed, the core concept behind sustainability is efficiency and using fewer resources (both natural, financial, and human) to generate the same or better business performance.
And much data underscores that point. For example, recent studies highlight a strong correlation between ; and there has been other realized financial benefits, such as a .
Over the last few years, ESG is sometimes presented as an exciting trend that will wane over time, but others believes at some point, ESG will be normalized as how business is conducted. In fact, this outcome is more likely because ESG has become an expanded framework through which to conduct a competitive analysis, just like the SWOT (strengths, weaknesses, opportunities, and threats) tool did decades ago. A key reason for this is that looking through an ESG lens allows for the identification of new or expanded risks and opportunities through regular consultation with an increasing list of company stakeholders.
One head of sustainability at a major bank states that investors 鈥渁re very risk-based, but the landscape has really shifted to risks and opportunities. Risks are still the bigger part of the pie, but like stakeholders, investors are asking like questions like, 鈥楬ow is the bank supporting the [climate] transition?鈥欌��
Analyzing the opportunities around ESG will be both industry- and company-specific, but generally, more than half of executives said they . Some of these opportunities, include improved return on investment ROI and elevated brand reputation, in addition to risk reduction. Indeed, many of these opportunities are multifaceted in areas such as:
Financial 鈥� Numerous sources, including the studies cited earlier, note the financial benefits of making ESG investments. In addition, ESG management and transparency have and should be incorporated in overall corporate strategy, and quarterly earnings guidance.
Employees 鈥� People want to work for a corporation about which they generally feel good. In addition, there is a growing body of evidence of a strong correlation between retention and ESG. 鈥淭op employers, as measured by employee satisfaction and attractiveness to talent, have significantly higher ESG scores than their peers and suggests that ESG performance can help companies both improve employee satisfaction and attract prospective employees,鈥� according to recent .
Branding 鈥� A strong commitment to ESG produces a positive public perception for companies. According to the , there is a direct correlation between an organizations social stance and its appeal to consumers. Further, noted that members of Generation Y and Z are 鈥渕ore likely to consider ESG in relation to trust, advocacy, and purchasing from companies.鈥� Also, 鈥渟ocial and governance factors, such as a commitment to human rights, diversity, and transparency in business practices, seem to be more of an influencer than environmental factors when it comes to purchasing decisions.鈥�
Of course, there are , and the ongoing complexity in the regulatory landscape and current lack of clarity in definition and standards, has thus far prevented the full realization of opportunities around ESG at the moment. However, these factors likely will lessen over time, possibly within the next three years.
Perhaps the most pervasive negative view of many critics is the one that holds that ESG is a temporary side-show for public relations purposes because it goes against Milton Friedman鈥檚 view of a public company鈥檚 while 鈥渃onforming to the basic rules of society.鈥�
And, yes, there is inherent conflict between doing well financially and doing good in the short term, but the conflict will decrease over time. Rachel Teo, head of sustainability at , one of three investment entities in Singapore that manage the Government鈥檚 reserves, points out that between the short and long terms will diminish because the cost and pressure by governments, investors, and societies to transition their businesses away from being negative forces will get priced into company share prices in the markets over time.
Another headwind adversely working against companies embracing ESG opportunities is how the weight of the pressure from multiple stakeholders impacts short-term decision-making by senior executives and corporate directors. 鈥淐-suites and boards typically make ESG decisions around what pressures they are seeing because of the current lack of clarity around ESG issues,鈥� says R Mukund, CEO of聽. 鈥淭heir activities are driven more by what pressures those decision-makers are feeling at the moment most acutely.鈥�
Whatever the headwind, ESG鈥檚 staying power is being driven by a multiplier of forces occurring simultaneously. The negative aspects around and transition costs of ESG will dissipate over time, as Teo argues, because they will be priced into the market over time. As for the ESG critics who hold Friedman鈥檚 view, may be society鈥檚 basic rules are changing because of humanity鈥檚 expectations around public companies鈥� positive role in society are quickly evolving.
