Who cares, wins: why ESG is important for your business

Sustainability

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Financial Management

Who cares, wins: why ESG is important for your business

Francesco Rutigliani | Jul 02, 2019

Would you invest in a refinery that is not taking any effort in mitigating its impact on the environment? Would you trust in a business that doesn’t care about employees welfare, gender equality or fair compensation policies?

If you answered “no” to any of the above - it’s not surprising. Most people would answer exactly the same. In recent years, there has been growing attention to topics related to environment and human rights, driving a radical change in the investment market. Businesses are asked to take charge of their impact on the world, and to make it as positive as possible - arriving at the point that investors are evaluating organizations not only based on financial performance, but also considering non-financial factors and how the organization itself is managing the related risks and opportunities.

Environmental, Social and Governance (ESG) issues are not just a matter of ethics - they have a clear impact on revenues. This is why every business should open a conversation on sustainability, without hesitation.

Responsible Investments

Socially responsible investment is not a new concept. Actually, it dates back to the ‘60s, when investors began to select more carefully the stocks they were betting on, their choices depending on motivations that were not strictly related to financial indicators - for example, refusal to invest in companies involved in South African apartheid regime.

Since then, the topic has been at the center of many conversations involving all major financial and regulatory institutions - including United Nations, European Commission, private and public investors, stock exchanges - leading to a concrete change with the release of new local and global regulations that impacts all market players.

The first modern milestone was led in early 2005 by the UN Secretary-General Kofi Annan, who launched the Principle for Responsible Investments (PRI) working with the world’s largest institutional investors and experts from the investment industry and civil society. This initiative was driven by the awareness that the performance of investment portfolios couldn’t be evaluated anymore by considering the traditional financial factors alone; the so-called ESG (Environmental, Social and Governance) factors should be included in the evaluation process as well, since non-financial issues such as climate change and human rights could have a direct impact on performances.

This was only the first of many steps in the same direction, toward the same goal - the most recent happening in 2015, when all United Nations Member States officially adopted the 2030 Agenda for Sustainable Development, a plan to stimulate actions in the next few years in areas of critical importance for humanity and the planet. The agenda states 17 universal Sustainable Development Goals (SDG) - spanning from ‘zero hunger’ to ‘industry innovation and infrastructure’ - asking to mobilize efforts to suppress poverty and inequality and stop climate change.

ESG Factors

First of all - what is EGS?

ESG stands for Environment, Social and Governance: these are the 3 main areas representing the pillars of a sustainable investment.

As explained in the previous section, companies are evaluated by investors using ESG criteria to rate the quality of investment and determine the associated risks. More in detail:

  • Environment factors refer to the company’s behaviour on environmental issues such as resource depletions, climate change, waste and pollution.
  • Social factors are related to the company’s treatment regarding people, workers and local communities, including health and safety issues.
  • Governance factors refer to corporate policies and governance, including tax strategy, corruption, structure, remuneration.

Why ESG matters for your business

In 2018, more than 170 new global regulatory measures were proposed (+160% vs. 2017), 80% of which were targeting institutional investors.

In March 2019, the European Commission as well has once again reaffirmed the importance of sustainable investments, with the release of new rules on disclosure requirements related to sustainable investments and sustainability risks.

It’s clear that social responsibility is a hot topic in the investor community and, regardless of the law requirements, something you should address inside your organization. As many investors are incorporating ESG factors into the investment process, integrating sustainability elements into your strategy can definitely have an impact on your revenues.

This requires a shift in mindset: ESG must be considered as an investment, rather than a cost. As Larry Fink from BlackRocks states in his 2019 letter to CEOs,Profits are in no way inconsistent with purpose – in fact, profits and purpose are inextricably linked.”

In fact, companies who have incorporated ESG matters into their strategy have gained several benefits, including increased market trust and value for shareholders.

Stocks of sustainable companies tend to outperform their less sustainable counterparts.

Source: R. G. Eccles, I. Ioannou, G. Serafeim "The impact of corporate sustainability on organizational processes and performance"
Management Science 60, no.11 (November 2004), 2835-2857

But planting a few forests here and there won’t exactly make the difference. If ESG initiatives are not representative of the company’s core business and environmental impact, these efforts can be lost on investors. Companies need to develop a Sustainability Intelligence strategy with full understanding of the risks and opportunities available to them, leveraging this information to drive initiatives and track KPIs that matter.

 

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