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THE RISE OF ESGIt’s Not a Passing Trend Cristina Silingardi In just the past year, Google searches for “ESG” have more than doubled. Those not yet acquainted with this acronym should get to know it. For those already familiar with ESG, you’re likely wrestling with it in different ways—namely, how to approach it and what it means for your business. Let’s take a closer look at this concept, and why it matters.
What Is ESG?
ESG stands for the environmental, social, and governance factors associated with business operations and asset management, and represents the three pillars of sustainability. While definitions of sustainability may vary from person to person, the 1987 Brundtland Report to the World Commission on Environment and Development framed it as “meeting the needs of the current generation without compromising the ability of future generations to meet theirs.” Although ethics-based, values-based, and responsible investing and operating approaches have been around in various forms and to varying degrees for many years, the term ESG was born of the 2005 Who Cares Wins conference in Zurich, which brought together a wide range of global finance professionals, research analysts, government leaders, and regulators to examine the applicability and role of ESG.
Why Is ESG Important for Businesses?
Some think of ESG as the proper balance of people, profits, and planet a company must attain if it wants to achieve sustainable growth. The ability to maintain that balance is certainly a strong indicator of an organization’s long-term success. Businesses should also embrace ESG initiatives because strong ESG performance is becoming increasingly important to consumers, investors, and other key stakeholders. Consumers are showing that ESG considerations are influencing their buying decisions more and more. A PWC review of ESG factors finds that consumers are more attracted to brands that live up to a purpose and values they can get behind.1 In 2021, approximately one-third of consumers demonstrated a willingness to pay more for sustainable products, with the average being willing to pay 25 percent more. Gen Z (32 percent of the global population) is willing to pay more than 30 percent higher prices for sustainable products and services.2 This is not a passing trend. Investors are also placing greater focus on ESG as a factor in what they put their money behind. They look to metrics like the SRI (Socially Responsible Investment) Score and a host of other indicators, such as whether the company has an ESG policy in place, any past legal issues associated with ESG factors, and specific attention to business ethics. A recent McKinsey study points out that investors “paying attention to environmental, social, and governance (ESG) concerns does not compromise returns—rather, the opposite.” Key factors cited include an increase in top-line revenues via new market segments, expense reduction through resource and process efficiency gains, government and community subsidies and support, and better utilization of capital with long-term investments.3
Are DEI Initiatives a Part of ESG?
DEI (diversity, equity, and inclusion) is indeed an important factor when it comes to ESG, especially for the social and governance components. American Century Investments notes that they factor DEI into their investment analysis because they “believe companies lacking transparency in this area or trailing their peers’ DE&I efforts may see negative impacts to their long-term competitiveness, brand reputation or financial condition.”4
Diverse organizations have better visibility into a broader array of community and environmental issues, tend to be much more transparent, and are better able to avoid and address conflicts of interest. This, in turn, leads to good governance and improved risk mitigation. DEI also supports better decision making, higher profitability, and long-term sustainability for organizations.
ESG Excellence Means Better Business
To paraphrase former Unilever CEO Paul Polman, companies can actually profit from solving the world’s problems, instead of creating them. ESG provides a framework that organizations can apply to achieve this aim. And in case the statistics cited thus far haven’t yet convinced you of ESG’s merits, consider a comprehensive review of the research by Arabesque Partners and Oxford University, which found that 90 percent of studies on the matter found that “sound ESG standards lower the cost of capital,” that 88 percent of studies show that “solid ESG practices results in better operational performance,” and that 80 percent of studies show that good sustainability practices influence stock price performance.5 Those are overwhelming findings that every CEO should take note of as they lead toward a profitable and sustainable future. Cristina Silingardi is Vice President with vcfo, a professional services firm making companies stronger by bringing the wisdom and experience of senior level Finance, HR, and Recruiting executives to each client engagement. Our team of consultants guides CEOs and business owners in making strategic decisions, optimizing operations, and providing people support. Since 1996, vcfo has supported more than 5,000 clients nationwide with offices in Austin, Dallas, Denver, and Houston. 1 PWC, “How Can Consumer-Facing Companies Weave Social Justice into Their DNA?” https://www.pwc.com/us/en/industries/consumer-markets/library/esg-metricsinfluence-buying.html. 2
Simon-Kucher & Partners, Global Sustainability Study 2021, October 2021.
Witold Henisz, Tim Koller, and Robin Nuttall, “Five Ways That ESG Creates Value,” McKinsey Quarterly, November 2019. 3
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Hannah Herold, “How Diversity, Equity & Inclusion Informs ESG Analysis,” 2020.
Gordon L. Clark, Andreas Feiner, Michael Viehs, From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance, March 5, 2015.
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