ESG factors have become crucial in attracting investors, retaining customers and maintaining a positive reputation. In this article, we will explore the importance of ESG performance and discuss why it's essential for your business to prioritize it.
The Growing Importance of ESG Factors
ESG performance is more than just a trend; it's a shift in the way businesses operate and are assessed.
Consumers, employees, investors and regulators are increasingly concerned about the impact of businesses on the environment, society, and governance structures.
A 2021 PWC Survey reports that:
- 83% of consumers think companies should be actively shaping ESG best practices
- 91% of business leaders believe their company has a responsibility to act on ESG issues
- 86% of employees prefer to support or work for companies that care about the same issues they do
As ESG commitments have gained strategic relevance, prioritizing ESG performance has become imperative for many companies.
The Benefits of Embracing ESG Performance
Attracting and Retaining Investors
Investors are increasingly considering ESG factors when making investment decisions.
In its fifth Global Sustainable Investment Review (GSIR) biennial report, the Global Sustainable Investment Alliance reported that assets managed under sustainable investment strategies grew by 15% between 2018 and 2020, reaching $35.3 trillion.
Furthermore, a 2023 meta-analysis by Morningstar found a positive correlation between ESG performance and US financial returns.
In the report it is stated that the number of sustainable open-end and exchange-traded funds available to U.S. investors rose to nearly 600 in 2022, up 12% from 2021.
Customer Loyalty and Reputation
Consumers are becoming more environmentally and socially conscious and looking to support businesses that align with their values.
A strong ESG performance can help an organization to differentiate itself from competitors, like Patagonia's commitment to sustainable production, and foster customer loyalty.
Moreover, maintaining a positive ESG reputation can help protect a business from potential public relations crises that could stem from negative ESG issues as in the case of LEGO, which has committed to using sustainable materials in its products and packaging by 2030, demonstrating its dedication to environmental sustainability.
Employee Engagement and Retention
Employees are increasingly seeking out employers who are committed to ESG principles.
By prioritizing ESG performance, a business can attract top talent and improve employee engagement, leading to higher productivity, reduced turnover and a more innovative and collaborative work environment.
For example, Salesforce has been recognized for its commitment to sustainability and social impact, which has contributed to its reputation as a top employer. Salesforce's efforts include setting a goal to achieve 100% renewable energy by 2022, implementing a comprehensive carbon offset program, and focusing on various philanthropic initiatives through its Salesforce.org branch.
These initiatives have earned the company different recognition, such as being named one of the World's Most Ethical Companies by Ethisphere in 2023.
Regulatory Compliance and Risk Management
ESG performance is becoming a significant factor in regulatory compliance.
Governments worldwide, such as the European Union with its Sustainable Finance Disclosure Regulation, are introducing new regulations to encourage businesses to operate more sustainably and ethically. By focusing on ESG performance, a business can stay ahead of regulatory changes and minimize the risks associated with non-compliance, as seen in the Volkswagen emissions scandal.
How to Improve ESG Performance
Establish Clear ESG Objectives and Targets
A crucial step for the improvement of ESG Performance is the development of a comprehensive ESG strategy that outlines the business's objectives and targets for each ESG pillar (environmental, social and governance).
For instance, IKEA's People & Planet Positive strategy sets ambitious targets for renewable energy, sustainable sourcing and social impact, which are aligned with its overall business strategy and values.
Measure and Report on ESG Performance
Measuring and reporting ESG performance satisfies two needs.
The necessity to improve ESG performance and to comply with national and international regulations requires businesses to measure and report their performance on a yearly basis. To do so it is necessary to implement robust data collection and reporting systems to track and assess a business's ESG performance.
Today’s technological progress provides different solutions to harvest, collect and model data in order to satisfy individual and regulatory requirements (GRI – EU Taxonomy – CSRD). Software solutions are different and provide customized services depending on the needs of the company.
Engage Stakeholders
Involving employees, investors, customers and other stakeholders in the company’s ESG initiatives has never been more important.
The satisfaction of all parties can make a business sustainable on the social and governance aspect as many elements affecting the ESG score can be linked to employee, local communities, management and governance.
An example is Starbucks’s effort to engage its stakeholders through initiatives like its Coffee and Farmer Equity (C.A.F.E.) Practices program.
Collaborate with Industry Peers and Partners
The joint collaboration is necessary to be able to endure the changes necessary for a sustainable development requires the creation of a network of peers and the implementation of partnerships.
It is important to join groups, networks, or associations focused on ESG issues, like the Sustainable Apparel Coalition or the RE100 initiative, to share best practices, learn from others and work collaboratively to drive ESG improvements across the company’s industry.
Conclusion
ESG performance is no longer an optional consideration for businesses; it's a critical aspect of long-term success.
As more companies begin to recognize the importance of ESG factors, it can be expected a greater shift towards sustainable and responsible business practices, ultimately benefiting the environment, society and the global economy.
By embracing ESG factors, companies can unlock numerous benefits, including increased investor interest, customer loyalty, employee engagement, and regulatory compliance.
