Are you prioritizing ESG strategy and ESG reporting in 2022? If not, you should be.
Whether your business is prepared for it or not, major changes in the ESG world will soon have an impact on your organization. Through a combination of pressure from investors, stricter regulatory conditions, consumer preferences, and changing compensation plans for corporate executives, there are growing expectations for companies to be more transparent and sustainable.
ESG is more than gathering data and putting out a report. It’s a fundamental shift in the incentives that drive business decisions. It’s not easy for companies to adapt in an increasingly ESG-centric world; business leaders are understandably nervous to report to public frameworks such as GRI and SASB and present their dirty laundry for the world to see.
Fortunately, you don’t have to be Patagonia to be viewed as a sustainable company.
Most investors and rating agencies measure a company’s ESG performance relative to that of its peers, and it’s understood that every industry has its own challenges that may be beyond an individual company’s control. Putting together realistic commitments and following through on your targets each year at least shows that you are serious about sustainable development. But perhaps more importantly, making investments in sustainable business practices shows that your company is focused on long-term success.
How ESG Reporting Feeds Companies’ Top and Bottom Lines
One of the main reasons that investors and executives have adopted ESG so quickly is that it’s profitable. There have been a wealth of studies showing a positive correlation between ESG and long-term risk-adjusted returns.
The ESG movement is primarily led by investors who look at ESG information as financial material data. These investors regard companies that are making necessary investments into a more sustainable future as better long-term investments. Below are the tangible benefits you can expect by investing in more sustainable strategies.
1. Easier Access to Capital
ESG investing is becoming more popular across a range of investment goals. A growing number of impact investors are seeking to align their investments with their values. Institutional investors with aggressive growth goals look for companies that are well-positioned for future success.
Even risk-averse investors such as banks and pension funds seek to avoid companies with high levels of acute or chronic risk. For companies, this means ESG performance can have a significant effect on their cost of capital and their ability to raise necessary funds.
2. Increasing Consumer Demand
Sustainability can significantly affect a company’s reputation in positive and negative ways. There’s a growing demand for brands that are environmentally friendly and avoid controversies.
As the attention in ESG world turns more towards supply chains, there will be greater pressure to work with vendors with quality ESG performance. Sustainability issues such as greenhouse gas emissions in manufacturing or shipping will be reflected up and down the supply chain, making product stewardship an even greater area of emphasis.
3. Reduced Regulatory Risk
Governments play a significant role in corporate profitability, and companies with negative environmental or social impacts are especially vulnerable to regulatory intervention. From policies around carbon pricing to minimum wage increases to international trade regulations, governments can have a major influence on the profitability of certain industries.
Companies that have negative market externalities that are unpriced—such as pollution or unfair labor practices—are at a higher risk of taxation or stricter regulations that can threaten profitability. On the positive side, sustainable organizations may find it easier to expand into different countries or even to receive government subsidies.
4. Improved Workplace Culture
There is growing evidence that ESG scores are positively correlated with employee satisfaction and attractiveness to talent. Millennials and younger people just entering the workforce want to work for companies with a sense of purpose, and they believe success should be measured by more than just profits.
In a competitive labor market, the costs associated with attracting and retaining talented employees is high. Companies with high involuntary turnover rates face many challenges: the costs for recruiting and training, the mistakes made by new hires, and the disruptions that turnover and the ramp to productivity can cause key partners and clients. Having a strong and well-articulated ESG proposition can help keep your employees engaged and loyal—and ensure a healthy pipeline of top-tier talent.
5. Significant Cost Savings
Although companies rarely pursue sustainability for the direct purpose of reducing their cost savings, improving sustainability can be a strong financial decision on its own merits. Renewable energy sources such as solar and wind have already dropped below the price of fossil fuels, and a power purchase agreement (PPA) can provide clean, inexpensive energy with minimal upfront investments from the purchaser. Many tech companies have benefited greatly from these arrangements to power their data centers.
Other companies have realized cost savings from attempting to limit waste or water, or moving to a circular economy approach. Not every ESG investment will pay for itself, but the cost savings in combination with the other benefits in this list can be enough to turn an investment positive. Investments that ignore sustainability—like a natural gas power plant or a farm requiring heavy irrigation—can turn out to be stranded assets if a company is not planning on the correct time horizon.
Start Reaping the Advantages of Sustainability and ESG Leadership
One of the strongest arguments for investing in ESG is that you’ll have to do so anyway. Regulation is right around the corner for listed public companies and large private companies. Why not reap the rewards of acting more quickly?
Many of the needed investments will take time and money to manage upfront but should pay dividends down the line. Showing leadership in sustainability is great for your reputation and shows that you are a forward-thinking organization. It’s difficult to be fully sustainable, but if you’re one of the select few companies making significant progress toward that end, the payoff will be that much greater.
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