Who really benefits from ESG?

Since its official launch in 2004, ESG (environmental, social, and governance) has steadily gained mainstream momentum. The ESG framework takes a holistic view, recognising that sustainability advances beyond environmental issues. Fundamentally, ESG has three areas: environmental (emissions, resource use, and climate risk); social (labor, supply chains, community impact, and human rights); and governance (board structure, CEO compensation, audit quality, and shareholder rights).
Today, ESG has become part of how companies do business, as companies recognise that its individual elements are closely interrelated. The current times demand that leaders proactively think and act on ESG to safeguard the company's long-term success.
ESG-oriented investing has also experienced a meteoric rise, and investment acceleration is driven by intensified attention from a broad range of strategic stakeholders, including social, government, employer, supplier, shareholder, and customer groups, on the wider impact of corporations.
Growing research shows that the ESG proposition is associated with higher equity returns and better business performance, including lower downside risk and higher credit ratings. According to McKinsey, ESG also drives customer preference. A study executed across multiple industries reveals that over 70 per cent of consumers are willing to pay an additional 5 per cent for a green product if it meets the same performance standards as a non-green alternative. For example, Unilever developed Sunlight, a dishwashing liquid that uses less water than other brands. Sales of sunlight outpaced category growth by more than 20 per cent in water-deficient markets. ESG can also reduce operating costs; McKinsey research suggests it can cut expenses by up to 60 per cent. When companies invest in ESG value propositions, they can achieve greater strategic freedom, as it will ease regulatory pressure and engender government support.
The ESG proposition is closely linked to employee productivity, as it helps attract and retain talent, enhance the employee experience, promote a sense of purpose, and increase overall motivation. Research from leading business schools has found that higher employee satisfaction is associated with superior long term shareholder returns. Other studies posit that when companies invest in authentic ‘give back’ and society initiatives, they often engender strong employee enthusiasm. Conversely, a weak ESG agenda can damage trust, reduce engagement, and drag down employee productivity. Farsighted companies extend their ESG propositions across their value chains to their suppliers and the environment.
ESG propositions can enhance investment returns by directing capital toward sustainable opportunities, including renewable energy and waste reduction, avoiding stranded investments and cash-draining options, and reducing reliance on energy-hungry plants and investments.
To drive the ESG value proposition home across all levels of the organisation and in the hearts of consumers and employees, leaders need to channel and prioritise ESG initiatives among the many environmental, social, and governance options. The ESG projects must be explicit, clearly articulated, and leverage the company's core competencies in context, thus strengthening their ties with different countries and communities. ESG profiles are not fixed but unique to each company, depending on its industry and position in the corporate life cycle.
To institutionalise the case for ESG value creation, leaders must do more than rely on top-down announcements. Leaders have to prioritise, link ESG propositions to value creation, and define hard metrics that correspond with the business model. Being transparent and thoughtful about ESG risks can be painful in the short term, but it is important for the company's long-term credibility. Building a strong connection with broad segments of society can be challenging, but it creates value and strengthens the company’s resilience. Incorporating the ESG framework helps companies rethink their values and align business strategies with the Sustainable Development Goals.