Environmental Social Governance (ESG) is often portrayed as an inhibitor to profit, but this can be clearly evidenced as a mistaken belief. Certainly, when viewed against a backdrop of quick short-term profits, ESG can appear to be another burdensome demand on corporate executive time.
However, implementing effective, robust strategies to satisfy the critical criteria of ESG will exponentially benefit any business in any sector. Interest in ESG has rapidly risen over recent times. Approximately $41 trillion is expected to be allocated in capital to ESG funds by the close of 2022, according to Bloomberg.
ESG commitments are challenges which must be overcome. This leads to a culture of innovation from the very top levels of businesses now having to adapt even more since the pandemic and the Ukrainian war.
An environmentally sound operation will be more sustainable and future-proofed. It will also appeal to the markets (gen Z consumers are willing to spend 10% more on sustainable brands, according to Forbes) and reduces negative PR. Energy efficiencies have an obvious cost bonus as well.
A good social policy is essential for an increasingly socially conscious public. Moreover, an ethical and equal employment policy attracts a higher grade of applicants for positions and increases the retention of skilled staff.
Poor governance can lead to legal penalties, licensing issues and negative brand impacts, to name but a few. Corruption will always eat into profit, efficiency and the overall survival of any business. Many government agencies and private sector stakeholders will expect a strong application of ESG to even consider doing business.
Establishing purpose is critical to expanding the total value of the enterprise, so that both investor and stakeholder value increases in the long term.
However, there is more to the story. Companies which score highly in ESG factors that are material to their industry, yet poorly in immaterial factors, have been found to outperform their peers by a statistically significant percentage3. Investments in ESG often require trade-offs, and the most productive investments appear calibrated to ESG factors that are highly relevant to the business in question, such as environmental protection for a natural resources company or customer privacy and data security factors for a technology company.
So, to conclude, whilst being altruistic and beneficial for the world ESG will also strengthen the profits, innovation, resilience and reputation of your business and build a sustainable economy for our today and tomorrow.
In case you want to read more on this topic, you might want to check:
- https://theimpactinvestor.com/esg-blogs/
- https://www.bsr.org/en/our-insights/blog-view/building-competent-boards-esg-is-not-about-skills-washing
Jay Begum
Investment Partner
Kylla Corporate Transactions
London
