An ESG business strategy goes beyond climate-related tactics such as earning LEED certifications or converting your fleet to run on alternative fuel. Instead, it’s an organization-wide approach to improving a company’s environmental, social and governance practices as a path to earning customer loyalty, reducing costs and boosting business value.
What Does ESG Really Mean?
To understand the benefits of ESG, it’s important to first grasp the individual parts of the acronym. McKinsey & Company points out that these elements are intertwined and that being proactive, rather than reactive, is a key to success.
Environmental: These are primarily climate-change related. What steps is the company taking to reduce its carbon emissions? How does it plan to reduce waste and energy consumption?
Social: This captures how diverse and inclusive the organization is, but also touches on the reputation the company has within the broader community, how the organization treats its workers and whether the business takes stances on social issues.
Governance: This focuses on the internal controls that are in place to provide proper leadership on matters such as regulatory compliance and decision-making processes.
Benefits of an ESG Strategy
Committing to an ESG strategy has the potential to create business value across a range of measurables. Here are just three of the main ones.
First, consumers have started shopping not just for a service or product but the company ethos behind it. A RepTrak analysis found that ESG was ninth among 32 factors when it came to purchasing decisions, but it was fifth of 32 when it came to recommending a company to others. Younger consumers place even a higher premium on strong ESG performance. Organizations in a B2B setting can benefit as well, since clients and customers also want to work with ESG-friendly firms—it betters their own ESG rating.
Second, McKinsey research has found that an ESG strategy can impact operating profits by up to 60 percent by helping reduce costs related to energy and fuel consumption, other raw materials, maintenance and more.
Third, an ESG strategy can broaden the potential investor base for publicly traded firms. Investment in ESG-related funds in the U.S. doubled from 2019 to 2020, according to S&P Global Intelligence – and these funds largely outperformed the S&P 500 index during the first year of the COVID-19 pandemic.
Challenges to Overcome
Building an ESG strategy will impact the entire organization, from the way the company governs itself to the resources it uses to manufacture products. Such a significant shift is not without challenges.
Due to the broad impact, ESG initiatives start with leadership. If the board of directors or top executives fail to grasp the benefits of ESG incorporation, then management will find it difficult to translate goals to the entire organization. An Ernst & Young white paper also noted that accountability is critical and many organizations are adding, or elevating the profile of, a chief sustainability officer (CSO). Whether responsibility falls with a CSO or some other individual or committee, that clear accountability is important.
The business-wide commitment to an ESG strategy also calls for connecting with a company’s purpose and business goals. For example, McKinsey cites an agribusiness leader that makes combatting hunger one of its missions.
A third major consideration is reporting. How to measure the success of an ESG strategy, as well as the ways to report on it internally and externally, can frustrate even the biggest global corporations. A Price Waterhouse Cooper report found that a lack of clear reporting standards is a big hurdle for many.
Ernst & Young noted that the International Business Council and World Economic Forum led a collaborative effort to create universal ESG metrics that were established in September 2021. While those might not be applicable for every size and type of company, establishing the right baselines for a particular situation is possible with the right data.
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