Environmental, social, and governance (ESG) issues are intrinsically entwined with the success of every firm. It makes logical, therefore, that a strong ESG proposal may create value—and in this piece, we present a framework for understanding the five primary ways a robust strategy and ESG reporting can do so.

Employee productivity increase

A strong ESG proposal and robust ESG reporting may help organizations attract and retain quality employees, enhance employee engagement by fostering a sense of purpose and raise productivity overall. Employee satisfaction is strongly connected with shareholder returns.

For example, the London Business School’s Alex Edmans discovered that the companies that made Fortune’s “100 Best Companies to Work For” list generated 2.3 percent to 3.8 percent higher stock returns per year than their rivals over a more than 25-year horizon.

It has also been known for a long time that workers who feel connected to their work as well as satisfied with it are more productive. The higher an employee’s perception of the effect on the beneficiaries of their work, the greater the employee’s motivation to engage in a “prosocial” way.

Investment and asset optimization

Capital can be more effectively allocated to more attractive and sustainable possibilities (such as renewables, waste reduction, and scrubbers) with a strong ESG argument, increasing investment returns. It can also assist corporations to avoid stranded investments\that may not pay off due to longer-term environmental difficulties (such as massive write-downs in the value of oil tankers).

Remember, taking adequate account of investment returns demands that you start from the proper baseline and use robust ESG reporting techniques. If you take no action in the area of environmental, social, and governance (ESG), you can expect to see a decline in performance rather than an increase.

Continuing to rely on energy-hungry plants and equipment, for example, can drain funds going forward. The costs of waiting around can be much higher than the costs of making the expenditures necessary to modernize your operations.

The norms are changing, and the financial stability of carbon-intensive companies may be negatively impacted as a result of governmental responses to emissions. And restrictions or curbs on such things as single-use plastics or diesel-fueled autos in city centers will place new restraints on multiple businesses, many of which will find themselves having to catch up. A growing trend in communities that are experiencing a renaissance is the repurposing of assets, such as the transformation of underutilized parking garages into residential or daycare spaces.

Enlightened value maximisation

The value placed on business varies from one culture to the next. But across legal regimes, maximizing wealth for the long run demands that managers consider trade-offs. As economist Michael Jensen puts it, executives might accomplish their shareholder-focused goal through “enlightened value maximization” under a system like the United States, where shareholder wealth maximization can have the power of law.

Management “spending an additional dollar on any constituency provided the long-term value added to the organization from such investment is a dollar or more” is the premise of this approach. That mandates a cost-benefit analysis for ESG investments, just as corporations would do when allocating cash for any other reason, and keeping long-term value generation in mind.

Minimizing expenditure

The adoption of ESG practices can potentially lead to significant savings. McKinsey’s study has revealed that growing operating expenses (such as the cost of raw materials and the true cost of water or carbon) can reduce operating profits by as much as 60 percent.

One of the benefits of implementing ESG properly is mitigating these effects. A similar analysis by our team discovered a strong association between resource efficiency and financial performance by using a metric (the ratio of energy, water, and waste generated to revenue) to compare the resource productivity of businesses across industries.

Several successful businesses were singled out from the study’s analysis of all industries, and these were found to be the same businesses that had gone the farthest with their sustainability initiatives.

Lessening of judicial and regulatory oversight

A lessening of regulatory pressure is one benefit that might accrue to businesses with a stronger external-value proposition. In fact, in case after case across sectors and locations, we’ve seen that strength in ESG helps decrease companies’ risk of adverse government action. There’s a chance it could even win over the administration.

There could be more at stake than you realize. According to our estimates, government regulation threatens around a third of annual company profits. The effects of regulations, naturally.

More attractive business proposition

Businesses can enter new markets and grow in existing ones with the support of a compelling ESG proposition supported by robust ESG reporting and data. If government officials have faith in a company, they are more likely to grant the necessary permissions for the company to expand.

In a recent huge public-private infrastructure project in Long Beach, California, for-profit corporations were vetted based on their previous performance in sustainability, for example. Superior ESG execution has demonstrably paid off in mining, as well.

Similarly, ESG factors can influence purchases. According to McKinsey, consumers are willing to pay more for “green” options. Upwards of 70% of consumers surveyed on purchases across multiple industries, including automotive, building, electronics, and packaging, said they would pay an additional 5% for a green product if it met the same performance standards as a nongreen alternative. However, there can be wide discrepancies in practice, including customers who refuse to pay even 1% more.

Conclusion

The correlation between a robust ESG strategy, strong ESG reporting and an increased competitive advantage is solid indeed. Particularly important are levers that can affect both the bottom and top lines. Leaders should bear in mind the interconnected nature of pressing environmental, social, and governmental issues. Businesses can enter new markets and grow in existing ones with the support of a compelling ESG proposition.

If employees have faith in a company, they are more likely to grant the necessary permissions for the company to expand.

Similarly, ESG competitive advantage factors can influence purchases. According to McKinsey, consumers are willing o pay more for “green” options. Upwards of 70% of consumers surveyed on purchases across multiple industries, including automotive, building, electronics, and packaging, said they would pay an additional 5% for a green product if it met the same performance standards as a nongreen alternative. However, there can be wide discrepancies in practice, including customers who refuse to pay even 1% more

The correlation between ESG to value development is solid indeed. Particularly important are five levers that can affect both the bottom and top lines. Leaders should bear in mind the interconnected nature of pressing environmental, social, and governmental issues.

To find out how Permutable can help benchmark your company’s ESG activities against your competitors and create competitive advantage, get in touch below.