How ESG Efforts Create Value For Businesses
A good sign that proves a movement is a good thing is the clear signs of progress. ESG is not only determined to improve the lives of communities, the planet and company workers, but it’s also designed to improve business operations, develop business value, as well as the benefits accrued to shareholders. For the longest time, the latter has been difficult to support as ESG is a philosophical investment decision and in the corporate world of finance there are no proper metrics.
Even with regulations demanding companies provide specific numbers, business processes that measure environmental impact, for example, do not always equate to dollar figures. However, a recent study from Bain & Company and EcoVadisdoes show promise that ESG activities do correlate to strong financial profitability and growth.
The only catch is this study focused heavily on private firms.
Even with that slight wrinkle, their study looked at 100,000 companies, with 80% of them being private businesses. So, chances are quite high that adopting ESG activities like sustainability, diversity and employee satisfaction will yield great results, which in turn lowers costs, raises quality and profits, and is an attractive example for investing.
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For the purpose of this study, EcoVadis revealed scorecards that measured a broad range of ESG activities. Some of them include:
Carbon reduction practices
Improving DEI (diversity, equity, inclusion)
Sustainability in management processes
From these aspects alone, the study was able to prove that those scoring well in these categories also had better financial overall performance.
To start, the study highlighted a connection between businesses that had more women on their executive teams, and profitability. It noted that annual revenue growth was approximately 2% higher for companies that had fewer women on their teams. But what’s also interesting is that this was the same case for companies that ranked in the top 25% of their respective industries for executive team gender diversity.
This coincides with several studies over the years showing the overwhelming benefit of including more women in executive teams. Women provide newer perspectives, can lead more effectively, are better communicators, and are more empathetic. Naturally, this positively impacts decision-making processes and leads to greater potential profitability through improved operations.
The study also found slight advantages for companies that focused on renewable energy usage. There was a correlation with higher EBITDA (earnings before interest, taxes, depreciation, and amortisation). This was especially prominent in sectors like natural resources, transportation, and industrial goods.
Despite renewable technology being pricey upfront, it’s clear it’s well worth the investment, as focusing on renewable energy sources now, and divesting from fossil fuels, can ensure far more efficiency when late adopters come onboard.
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Supply Chain Models
A larger problem that big corporations are facing is in their supply chain management. With so many contractors and outsourcing, it’s a nightmare to navigate. However, the effort is well worth it, despite the headaches. You can see this when you look at private businesses in this study.
When it comes to supply chain models, companies have margins 3 to 4% higher than those that don’t focus on suppliers’ ESG credentials. These credentials would not just focus on environmental concerns as a company's objective, but also on hiring practices, employee engagement, and ethics, and how all these values are closely related to stakeholder treatment within supply chains.
Employee Satisfaction and Business Value
Just as much as ESG leaders focus on these broad business changes, they still look out for their employees. That much is clear from the fact that the study found higher rates of employee satisfaction when the employees knew someone was guiding, motivating, and supporting them at work. Employee engagement that leads to greater well being can significantly affect the ability to improve efficiency.
That in turn correlated to more profitability and rapid growth. Putting some numbers to it, the study found a three-year revenue growth of up to 5% above those with less satisfied staff. They also enjoyed margins that were at least 6% higher.
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Still Room To Grow And Make An Effort
Ultimately, this study sheds a lot of light on ESG and how helpful it truly is. And the best thing about this work is that it shows this is only the start. As the study pointed out, only 35% of large private companies are achieving these top scores and creating new opportunities with employees and stakeholders that leads to success, as with the few examples of benefits as mentioned above.
For large public companies, that number is 53%. That leaves plenty of room for new adopters.
But the biggest victory that this study reveals is that, for the companies involved, it serves as an excellent case study for ESG effectiveness in business. Again, many organizations that oppose ESG tend to argue that it doesn’t improve financial performance or say that it’s difficult to measure how profitable a company can be when it considers these approaches.
But now this study makes it clear, and it shows that there is profit and growth to be had in this area. That's great news not just for the organization involved, but also for its stakeholders, existing customers, and consumers alike. And it’s only just starting.
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