Creating value and business resilience through ESG
Environmental, Social and Governance (ESG) is fast becoming common language in the boardroom and we think it can form an essential part of your leadership rhetoric when building business and gaining the support of your internal and external stakeholders. In the investor community, ESG factors have long been integrated in investment decisions.
What is ESG?
Environmental, Social and Governance (ESG) is essentially a set of performance indicators that allows companies to measure sustainability and assess and report on their future preparedness. This means they can manage what are often longer-term strategic risks, delivering short-term competitive advantage and ultimately value creation for shareholders. Investment professionals treat ESG factors like any other type of financial factors and recognise they affect economic, industry and company analysis. In turn this impacts forecasted financials or adjustments to valuation models.
Why ESG is good for business
1 / Engaged and productive workforce
Whilst the ‘S’ relates to Social factors and therefore directly impacts in this area, however you should not underestimate the value that Environmental and Governance issues bring to the workforce too. More than ever before, investors, employees, customers and communities are asking more questions about how a company manages its operations and performance across all three.
Integrating ESG into the management of a company will help to boost employee motivation, attract and retain talent, whilst delivering greater social credibility in the marketplace. At a more granular and particularly relevant level in the context of the Covid-19 pandemic, it recognises the importance of safeguards in communities and in businesses. For example reviewing how your company manages the health and safety of people by enabling flexible teams with options to work adapted hours or remotely. Other key considerations include having a clear commitment to diversity, employee and community engagement, as well as supply-chain management.
A recent article by the London Business School’s Alex Edmans outlined how employee satisfaction positively correlates with shareholder returns. They found the companies that made Fortune’s “100 Best Companies to Work For” list generated 2.3 percent to 3.8 percent higher stock returns per year than their peers over a greater than 25-year horizon.
2/ Value creation
Meaningful ESG integration throughout each department of a company drives value over the long and short term. This does not necessarily mean a fundamental change in business practice, but could mean a shift in emphasis on certain areas of the business, such as energy use or diversity. A clear ESG agenda delivers top line growth by attracting customers with a strong sense of purpose and action and enabling them to make more sustainable decisions.
It also enables operational cost reduction through lower energy consumption, reduced water intake and minimised packaging costs. In addition, with an emphasis on the health and security of your supply chain, businesses achieve better access to resources through stronger community and government relations. Recent McKinsey research found ESG helps combat rising operating expenses (such as raw-material costs and the true cost of water or carbon), which can affect operating profits by as much as 60 percent.
3 / Resilience
ESG performance is an integral part of developing organisations that are equipped to ‘weather the storm’ both now and in the future. Research published by BlackRock in May 2020 suggests a majority of ESG-tilted investment portfolios have outperformed non-sustainable counterparts during this year’s coronavirus-fuelled downturn. These types of companies embed sustainability into their business models and decision-making structures, engaging with a range of stakeholders to prepare for any related risks. Recent research from data provider Morningstar examined the long-term performance of a sample of 745 Europe-based ESG funds and showed that the majority have done better than non-ESG funds over one, three, five and 10 years. ESG funds’ low exposure to volatile oil and gas markets is just one reason for this, along with a range of material sustainability characteristics, such as employees satisfaction, the strength of customer relations and board effectiveness.
Reuters reviewed companies resilience in Q1 2020 which indicated that ESG funds in the UK and EU have largely responded better in the market to non-ESG focused funds. What matters is the resilience of companies to shocks, and sustainability is fast becoming a core part of that.
If you’re interested to know how your business can incorporate ESG to enhance your workforce, create value and bolster your company’s resilience, don’t hesitate to get in touch.