For executives and investors alike, understanding the links between ESG and business value is essential to making sound decisions about how to allocate capital and other resources.
ESG priorities have become mainstream in finance and management, with global assets managed according to sustainable-investment strategies doubling to $30.7 trillion in the past six years, representing a third of all managed assets. In August 2019, the US Business Roundtable affirmed its commitment to various stakeholders, signaling a shift towards broader corporate responsibility. Increasingly, investors and executives recognize the positive impact of addressing ESG concerns on business performance, supported by research linking strong ESG propositions to higher financial returns and reduced downside risk. As companies consider post-COVID-19 reinvention, integrating ESG issues into their plans becomes crucial.
However, understanding how ESG relates to business value is not always straightforward. This article delves into the value creation potential of the environmental aspect (the “E” in ESG), encompassing criteria such as energy usage, emissions, waste management, and ecological impact. Specifically, the environmental dimension contributes to value creation in five key ways.
Top-line growth:Companies with robust environmental propositions can access new markets and expand existing ones. Research indicates that consumers are willing to pay a premium for environmentally friendly products, with a significant percentage expressing willingness to pay extra for green alternatives across various industries like automotive, building, electronics, and packaging.
Meeting consumer demand for environmentally friendly products can yield tangible benefits. For instance, when Unilever introduced Sunlight dishwashing liquid, which used less water compared to other brands, sales of Sunlight and other water-saving products surpassed category growth by over 20% in water-scarce markets.
Cost reduction is another advantage of effective environmental management. By addressing environmental concerns, companies can mitigate rising operating expenses, including costs related to water, carbon, and raw materials. Initiatives like 3M’s “pollution prevention pays” program, which focuses on product reformulation, process improvement, and waste recycling, have resulted in significant cost savings. Similarly, FedEx’s transition to electric or hybrid vehicles has led to substantial fuel savings.
Reduced regulatory interventions:Careful environmental management can also reduce regulatory interventions, providing companies with greater strategic freedom. Analysis shows that around one-third of corporate profits are at risk from state intervention, particularly in sectors like automotive, aerospace, defense, and technology.
Employee productivity:Improving environmental performance can enhance employee productivity by attracting and retaining high-quality talent and fostering a sense of purpose among employees. Research suggests that companies recognized for their positive environmental impact tend to have higher stock returns. Conversely, poor environmental records can lead to productivity issues, such as strikes or supply chain disruptions.
Investment and asset optimization:Effective environmental strategies can optimize investments and assets by directing capital towards sustainable opportunities and avoiding investments vulnerable to long-term environmental risks. Ignoring environmental concerns can result in declining value over time, underscoring the importance of proactive environmental management.
Overall, the connection between environmental initiatives and value creation is robust, especially in a world where environmental issues are increasingly urgent. The aforementioned strategies can significantly impact a company’s bottom line while addressing environmental challenges.
Tran Dung/ATES GLOBAL
Source: Mckinsey
