Over the last few years there has been a huge investment by larger businesses into ESG (Environmental, Social, and Governance). Coming out of the pandemic most the larger FTSE businesses and accountancy firms were all recruiting sustainability accountants. This was initially heavily driven by changes in reporting regulations but increasingly there was a belief of a connection between ESG and profitability, and how embracing these principles can pave the way for sustainable success.
Recently new research commissioned by accountancy firm Moore Global produced a report (The $4Trillion ESG Dividend) saying that there was a clear connection between ESG and improved financial performance. This highlighted that:
• Companies which express commitment to ESG have seen profits rise 9.1% and revenues grow 9.7% over the past three years, compared to profits rising by 4.5% for those who didn’t.
• As many as 84% said that their ability to raise capital had become slightly or significantly easier.
• While service sectors such as IT and finance have embraced ESG, the public sector lags.
The ESG Landscape
ESG refers to a set of criteria that investors and stakeholders use to assess a company’s impact on the environment, society, and governance practices. While these considerations have been around for decades, they’ve taken on newfound importance in recent years. Here’s why:
1. Attracting Responsible Investors:
Investors are increasingly factoring ESG performance into their decision-making processes. Companies that excel in ESG are more likely to attract investments from socially responsible funds, pension funds, and ethical investors.
2. Enhanced Reputation and Brand Value:
ESG initiatives improve a company’s public image and build trust among customers and partners. Positive perceptions translate into a stronger brand, customer loyalty, and long-term profitability.
3. Risk Mitigation:
Robust governance practices and ethical behaviour help companies avoid legal troubles and reduce the risk of financial setbacks. This, in turn, protects profitability.
4. Cost Savings:
Sustainable practices often result in cost savings through resource efficiency, reduced waste, and lower energy consumption. Companies adopting green technologies and responsible supply chain management can significantly cut operating costs.
5. Access to Capital:
Companies with strong ESG credentials have better access to capital at competitive rates. They can tap into green bonds, sustainability-linked loans, and other financial instruments tailored to ESG objectives.
6. Talent Attraction and Retention:
ESG-driven companies tend to attract top talent and experience lower turnover rates. A motivated and skilled workforce is key to driving profitability.
7. Long-Term Vision and Innovation:
ESG initiatives encourage companies to adopt a long-term perspective and invest in innovation. This can lead to new revenue streams, product lines, and market opportunities.
Here are a couple of real-world examples that illustrate the ESG-profitability connection:
Unilever: The consumer goods giant has embraced sustainability through its Sustainable Living Plan. This commitment has not only enhanced its reputation but has also driven innovation in products and manufacturing processes, ultimately boosting profitability.
Tesla: Tesla’s focus on sustainable transport and renewable energy has made it one of the most valuable companies globally. Their products align with the growing demand for eco-friendly alternatives, driving strong sales and market performance.
Your Path to ESG-Driven Profitability
Embracing ESG isn’t just about checking boxes—it’s a strategic transformation that requires commitment and consistency. Here are some steps to get started:
Assessment: Conduct a thorough ESG assessment of your current operations, identifying strengths and areas for improvement.
Strategy: Develop a clear ESG strategy that aligns with your business goals, values, and long-term vision.
Integration: Embed ESG principles into your corporate culture, operations, and decision-making processes.
Measurement: Implement key performance indicators (KPIs) to track your ESG progress and report transparently to stakeholders.
Continuous Improvement: Regularly review and update your ESG strategy, adapting to changing market dynamics and stakeholder expectations.
In conclusion, ESG isn’t just a “feel-good” trend—it’s a proven driver of profitability and long-term success. By embracing ESG principles, your company can unlock new opportunities, reduce risks, and build a more resilient and prosperous future.