Does ESG Threaten Company Competitiveness?
ESG has gained importance as more businesses and consumers recognise its value. New mandatory ESG legislation has been drafted and will soon become law, to provide both transparent ESG evaluation and combat greenwashing. Companies have come under pressure from stakeholders to publish their ESG ratings so that they can assess any potential ESG risks related to their investments. Customers are more drawn to environmentally friendly businesses with environmentally conscious packaging and goods, and employees, particularly young people, are more likely to work for businesses that share their moral values and prioritise environmental sustainability and climate goals above all else.
Clearly, ESG issues have risen to the top of the list for companies. According to PwCs Global Investor Survey 2022, investors are seeing that more companies are making sustainability a top priority and are making sure that there is greater transparency and financial discipline for the same. The report also states that climate change and the business risks associated with it has made investors realise the importance of ESG.
However, are our companies falling short of their competitiveness in this frenetic drive to achieve high ESG scores? Is it unfair to prioritise ESG and sustainability while downplaying the relevance of a company's overall growth? Are businesses losing a fundamental understanding of what it means to be competitive, focusing primarily on short-term gains rather than building a long-term strategy? Is ESG causing companies to ignore other vital business operations that are just as crucial? Let's break this down piece by piece.
Featured Article: The Top 3 Visible Benefits Of ESG Investing
Companies are looking to develop a positive brand image that will stick with customers, helping to form a strong, lasting reputation. To this point, there is a recognition that sustainability plays a significant role. According to a Global Sustainability Study 2021, sustainability has emerged as a key factor for consumers purchasing products and in building positive brand reputation for companies. The study states that over one third of consumers are willing to pay more for sustainable products and services. Consumers are now looking for companies that make sustainability a priority. This helps businesses in not only catering to social causes but also in building a solid reputation for being an environmentally conscious brand.
ESG builds reputation…
To effectively embrace change, businesses need to know how any change will be beneficial, that it will have both an immediate, visible impact, and be good for them in the long run. In this scenario, ESG allows companies to take a step back and assess their operations, collect and report data, and thereby identify areas for improvement. ESG is therefore of concern for companies looking to make ethical investments and take responsibility for the climate impact that their operations have caused, while developing new pathways to continued profitability and business health.
By demonstrating to potential investors, clients, and stakeholders that a firm is dedicated to environmental sustainability, social responsibility, and ethical business practices, a high ESG score can improve a company's corporate reputation. Companies that integrate ESG into their operations not only gain confidence but also benefit from higher levels of human capital productivity and employee happiness, which enhance total company performance.
A successful ESG strategy will also aid in achieving healthy staff productivity, employee retention, and the recruitment of new, capable talent. This is also achieved by promoting efficiency and openness in business operations.
…and delivers strong ROI
According to a PwC report, asset managers globally are expecting to see an exponential rise in their ESG-related assets under management (AuM) to USD 33.9 trillion by 2026 from USD 18.4 trillion in 2021.
The study demonstrates how institutional investments with an ESG focus will yield greater commercial returns than conventional investments. The ability to realise better commercial returns is the key indicator of ESG success, and is, pragmatically, going to be the main driver of demand to invest in such projects. Building a solid reputation as an environmentally conscientious business is laudable, but to be realistic, interest will surge when money is linked to compliance.
While the significance of ESG ratings across a range of industries cannot be discounted, businesses must ensure they evolve to meet the changing needs of the market, react to emerging trends, and maintain long-term objectives, in which ESG may just be one piece of the puzzle. Thus, a balance between 'traditional' imperatives and ESG initiatives that works and doesn't detract from operational efficiency.
However, conditions are rapidly evolving. Businesses must also be ready to understand that many 'traditional' aspects may soon be supplanted by opportunities for sustainability, which will be recognized as the 'new norm'. Pressure is mounting from society (stakeholders) and investors or staff (shareholders) to embrace change and avoid an imbalance..
A recent example of this imbalance is the chief executive and chairman of Danone, Emmanuel Faber, stepping down from his position due to activist shareholders complaining about him not managing to strike the right balance between shareholder value creation and sustainability. This led to him being more concerned about social responsibility than shareholder interests.
Some shareholder activists are trying to politicise such situations by searching for weakness in ESG ratings. While this comes from a place of progressivism, it can cause additional instability when, for example, other ESG success goes unnoticed. Companies should pay attention to the types of issues driving activism campaigns. Do they have other vested interests in mind, or are they genuinely interested in and morally aligned with a company's ESG values?
As with all things, there is a balance. That is for each business to discover so that ESG continues to be a progressive operational advantage, and not a 'susceptibility' where activism is concerned.
To evaluate how to sustain operations over the long-term and thereby remain competitive, ESG is key. As a framework, it is diverse enough to encompass equal and fair employee opportunity, the governance policies that take into account both the operational needs of the company as well as staff welfare, and the climate-related ‘environmental’ (or resource use) objectives that will spur sustainable growth and cost efficiency.
Equally, the consequences of greenwashing do significant harm to brand image and cause a loss of faith in sustainability efforts across all concerned stakeholders. Instead, working towards transparency via a culture of 'open data', that being ESG ratings and reports, will enable a company to grow amid a healthy level of criticism and the ability to implement change.
A threat? Certainly not. More data means more situational awareness. Being aware of what made you competitive in the first place still holds true, but you cannot sacrifice being open to evolution. Long-term company strategy development and ESG are two sides of the same coin, and short-termism is inherently full of risk. ESG should therefore not be viewed as a threat, but a requirement for long-term viability. A toolkit for competitive advantage.
'Business as usual' will not fare well. 'Disruption' may also be too strong for the average palate. ESG, however, is about competitive evolution, and must play a decisive role to solve the changes to come.
To check how your company’s ESG scores fare among industry peers, take a look at our Company ESG Profiles.