ESG, or environmental, social and governance, is a set of criteria that can be used to assess the environmental and social impact of a company. It’s incredibly important for businesses and investors, and it can be performed on an internal or external basis.

Broken down into three different components, ESG evaluates whether or not a company is using sustainable practices in their day-to-day practices from an environmental perspective. Socially speaking, this assessment takes into consideration the impact a company has on its customers, employees, the community and so on. From a governance perspective, ESG considers the different internal procedures that are used by leadership.

A growing concept, approximately 89% of investors considered utilizing ESG for their investment plan in the year 2022, according to a study performed by the Capital Group. This was an increase of approximately 5% from the previous year. Let’s explore five of the ways that ESG creates value for both businesses and investors.

Improving Operational Efficiency and Reducing Costs

Cutting costs is something that a lot of businesses and investors are focusing on because of the uncertainty in the economy. By utilizing an ESG strategy, there can be an increase in efficiency. This strategy can incorporate things such as equipment upgrades and the use of renewable energy. Taking an in-depth look at how a business operates can lead to small changes that have a profound impact.

As an example, Walmart is a company that is very committed to ESG to reduce emissions and avoid supply chain emissions while maintaining a resilient business that withstands the effects of climate change.

Strengthening Brand Reputation and Customer Loyalty

Profitability is strongly related to a brand’s reputation and customer loyalty. ESG can help strengthen these factors by aligning a business with social values and the needs of stakeholders. Fostering trust in these relationships is necessary.

A popular fast-food restaurant with locations in France, made the choice to restructure its supply chain to source 75% of its supplies from local suppliers. This was done to create a better reputation among their customers. A sustainable waste strategy was also put into place, making key changes to packaging, waste collection and waste sorting.

Mitigating Regulatory and Legal Risks

Let’s not forget that while ESG can be a proactive choice that companies and investors make, there are certain environmental laws, social standards and governance principles that must be met. There are a lot of companies that are making claims that their products are eco-friendly, safe for the planet, etc. However, these claims end up having no real basis.

In the United States, The Uyghur Forced Labor Prevention Act 2021 outlined the assumption that all goods that are sourced from Xinjiang, China, are likely to come from forced labor. Companies such as BMW, Goodyear, Volkswagen, Coca-Cola, Kraft and Apple were all forced to adopt ESG principles in order to avoid fines, or they had to provide that their goods were not sourced from forced labor.

Attracting and Retaining Talent

ESG has the potential to help businesses and investors create very diverse and inclusive work environments. There are a number of companies that are attracting and retaining talent because of their fair compensation, flexible work environments and available learning opportunities. This includes AirBnb, CarFax, Oracle and CBS Interactive, which all have work from home policies in place.

Enhancing Financial Performance

ESG can help businesses generate higher returns, lower volatility and better resilience by focusing on risk management and performance improvement. You’ll notice that a lot of companies are now advertising that their business practices reduce greenhouse gases and carbon emissions to some degree. There is also the concept of assessing business practices based on environmental concerns such as the prospect of natural disasters interrupting business. Promoting a healthier workforce, focusing on diversity and supporting ethical practices are all ESG strategies that have become commonplace.

From an investor perspective, ING provided a $1.2 billion loan to Philips in 2017, with the potential to support ethical practices, improve healthcare, etc. Philips is a leading innovator in health technology and products. Regarding diversification and better resilience, the CEO of Unilever, Paul Polman, increased profits by initially ending quarterly earnings when he accepted a position with the company. His business strategy focused on strategy over a longer period of time rather than worrying about profits in the short term.

ESG can create value for businesses and investors by focusing on environmental, social and governance concerns. All of these concepts overlap with one another, with a proactive approach becoming increasingly popular. If you would like to find out more about the importance of ESG, please subscribe to our newsletter. Don’t forget to share this post on social media, If you liked it.