ESG strategy helps businesses attract investors, build customer loyalty, improve financial performance, sustainability of operations and gain competitive advantage. Not only investors, but also companies are increasingly oriented towards ESG. In addition to pressure from investors, buyers and customers, the catalysts for this change have also been the COVID-19 pandemic, climate change concerns, the growing number of cyber incidents, global supply chain issues, economic inequalities and social justice movements.Â
ESG (Environmental, Social, Governance) is a framework for sustainability management, ethical practices and conscious consumer behavior that is becoming increasingly popular in the business world. However, this is not a new phenomenon. Rather, it is a continuation of socially responsible investing that has gone mainstream. The term ESG was officially coined in 2004 with the publication of the first report of the UN Global Compact initiative "Who Cares Wins" and investing in ESG has developed and expanded since then.
Socially responsible investors and other stakeholders – including employees, customers, regulators, suppliers and distributors – want to know about a company's attitude towards socio-economic factors, its sustainability efforts and management processes. According to Bloomberg Intelligence, global ESG investment assets under management could exceed $50 trillion by 2025, one-third of total assets it projects then. Although setting up a successful ESG plan for any business can seem challenging, a well-thought-out ESG strategy can lead to several business benefits.
What is an ESG strategy?An ESG strategy is an organization-wide approach that adapts a company's environmental, social and governance practices to increase business sustainability. Now more than ever, a company's success and growth is directly linked to a strong ESG strategy, which includes doing business in a way that delivers long-term value without negative impacts on the environment or society – or at least those impacts minimize.
A good ESG strategy includes various sustainability factors – such as a company's efforts to reduce its carbon footprint, go green, promote diversity or implement employee health programs. It also focuses on the initiatives that are most important and easiest to implement for the company. Such an ESG strategy paves the way for gaining investor confidence, customer loyalty, reducing operating costs and improving asset management and financial performance.
5 benefits of ESG for companies
Using the ESG framework can have tangible benefits for both companies and investors. For companies, this opens up access to more capital and fosters a stronger brand identity, while investors can demonstrate their values ​​and often achieve returns comparable to or better than traditional approaches through ESG-focused brand investments.
- Maintaining competitiveness
Companies that have developed an ESG strategy often gain a competitive advantage over business rivals. For example, a 2022 survey of 1,062 US residents by GreenPrint, a supplier of sustainability tools now owned by PDI Technologies, found that 66% of respondents would be willing to spend more money on green products. Similarly, 70% of 400 IT professionals surveyed by TechTarget's Enterprise Strategy Group in 2022 said their business would be willing to pay more than a 5% premium for vendor IT products.
The various ESG metrics that firms track and report are also important to consumers, employees, creditors and regulators. Company leaders who strive to improve working conditions, promote diversity, contribute to the community and express their position on socio-economic issues play a significant role in strengthening the company's brand.
- Attract investors
The inclusion of ESG reports in earnings statements or in separate announcements is a trend among businesses. Investors and lenders are increasingly attracted to organizations that invest in ESG and use ESG reporting to inform their sustainability efforts. A Gallup study published in 2022 found that 48% of investors are interested in sustainable investment funds, while a Dow Jones survey of 200 investment professionals, also conducted in 2022, predicted that ESG investments will more than which they will double.
Public concerns raised by the pandemic, climate change and the misuse of natural resources are leading investors to change their views on sustainable companies and tear down those with outdated practices – such as unfair wages, fossil fuel investments, unsustainable farming methods and the production of sustainable products. By providing a comprehensive overview of their practices, companies involved in ESG initiatives can influence investment decisions and enable investors to choose a company that offers a sustainable future with a low risk profile.
- Improving financial performance
ESG not only makes a business attractive to investors, but can also improve the overall financial performance of a business. Even small efforts towards sustainability - such as going paperless, recycling or making energy-efficient upgrades - can improve a company's financial position and earnings.
To keep up with ESG programs, companies need to track key metrics – such as energy consumption, raw material use and waste treatment – ​​that can ultimately lead to lower energy bills and cost reductions. Companies that comply with ESG regulations also have a lower risk of fines, sanctions and other business risks, which positively affects their financial situation.
For example, in 2020 Nestlé, a food and beverage company, announced that it would invest up to $2.1 billion by 2025 to switch from traditional plastics to food-grade recycled plastics. The move is expected to help Nestlé reduce its carbon footprint and reduce compliance costs - especially in regions where there are stricter laws against the use of plastic packaging.
- Building customer loyalty
In Accenture's 2021 survey of more than 25,000 consumers from 22 countries, 50% of respondents said they had changed their product purchasing priorities as a result of the COVID-19 pandemic. These consumers are willing to pay more for brands that align with their values ​​and are more loyal to organizations that treat people fairly. Today's socially responsible consumers want to know what the companies they support are doing for the greater good.
Companies that adhere to ESG principles can win and retain more customers by being transparent and effectively communicating their ESG efforts to customers.
- Sustainability of the company's operations
Firms investing in ESG can maintain and adapt to an ever-changing landscape. For example, companies that properly integrate ESG principles into their core operations are better able to identify cost-saving opportunities and have lower energy consumption, less resource wastage and overall lower operating costs.
Although ESG reporting is currently, according to the latest EU CSRD Directive, only mandatory for publicly traded companies and companies with more than 250 employees and a turnover of more than EUR 40 million, it is more than certain that will gradually be required. even from small and medium-sized companies. The reason is that these companies are part of the supply chain of larger companies that will require this data from them. Businesses that overlook ESG now may face it in the future in the form of legal, regulatory, reputational and compliance issues.
Is ESG for companies of all sizes?
Sometimes small and medium-sized enterprises (SMEs) think that a lack of resources can be a barrier to paying attention to ESG and that their ESG efforts will not pay off in the long run. However, investing in ESG - even on a smaller scale - ultimately has a positive impact on the business.
While larger organizations may have extra resources to draft ESG policies or create high-level sustainability partnerships, SMEs can attract socially responsible investors without going through the bureaucracy and administrative hurdles that larger organizations face. Smaller firms are often closer to their clients and have ample opportunity to share their ESG stories and the sustainability journey they are on.
ESG for the long term
An effective ESG strategy demonstrates the company's commitment to risk management, cost reduction and environmental care. It also indicates that the company has a strong stance on socio-economic issues - including customer satisfaction, labor standards, social injustice and sustainable investment - and is willing to actively evolve with a changing market. ESG and other sustainable funds delivered even lower volatility and often outperformed traditional funds in 2020 and 2021, with similar returns in 2022, according to Morningstar data.