Why ESG factors are beneficial to your business?

Consideration of ESG factors has gone from a nice-to-have to a need-to-have over the past decade. ESG issues were often unsuitably described as “non-financial”, suggesting that they have no significant financial impact on the bottom line, either as a risk to revenue or an opportunity for business growth. Recently, companies and investors have recognized that this perception is mistaken and ESG factors are fundamental to business performance and need to be disclosed in conjunction with financial reporting.

I. Explaining ESG

ESG refers to the environmental, social and governance practices that have a material impact on the performance of the company or investment. The integration of ESG factors is used to enhance traditional financial analysis by identifying potential risks and opportunities beyond technical valuations. While there is an overlay of social consciousness, the main objective of ESG evaluation remains financial performance.

Table 1: ESG Factors

II. Why is ESG important?

A) Investors and Asset Managers View

Increasing interest in ESG from the investor side is driven mainly by financial objectives. Results of recent MSCI research proven that considering ESG factors during the investment process helps to generate more stable high-quality return stream. Consideration of ESG factors by investors is shifting away from risk mitigation towards achieving material objectives – i.e. driving Return on Invested Capital, equity valuation and stock performance.

According to CFA Institute Survey from June 2018, over 80% of investors considered ESF factors in their investment decisions. The table underneath illustrates their motivation.

Table 2: Do you consider ESG information when making investment decisions?

In addition, a recent survey from the Morgan Stanley Institute for Sustainable Investing and Morgan Stanley Investment Management[1] that gathered insights from 118 global asset owners, 60% of which had assets over $10 billion, finds that 84% are pursuing or actively considering pursuing ESG integration in their investment process. Of those, 60% began doing so in the last four years and 37% within the last two. Another survey by State Street Global Advisors states that 80% of institutions now incorporate an ESG component within their investment strategies, with more than two-thirds of these institutions stating that the integration of ESG has significantly improved their returns.[2]

Investor interest in ESG grew rapidly. Signatories to the UN Principles for Responsible Investment, launched in 2006, committed to incorporating ESG issues into their investment analysis and ownership policies and practices. As of 2018, the princi­ples have over 1,900 signatories, with total assets under management over $70 trillion.  [3]

B) Companies View

As a result of increased commitment to ESG and responsible investing from investors and asset managers, more companies implement ESG to their reporting practices to better showcase their commitment. According to a roundtable discussion organized by Pensions & Investments, less than 25% of the 500 largest companies globally were producing sustainability reports five years ago. As of 2017, over 80% of these companies now produce reports of this kind.[4]

However, apart from responding to investors’ expectations, there are more reasons for companies to implement Environmental, Social and Governance factors to their strategy.

Why is it worth for companies to implement ESG?

C) Millennials

As an example, in the US there are currently 92 million Millennials and by 2025 they will represent 75% of the workforce. The purchasing power among this generation represents $2.75 trillion in spending power globally.[5]

Millennials represent different values and worldview in comparison to previous generations. They are seeking meaning and authenticity in companies they buy from or they work for. Recent studies showed that “more than 9 in 10 Millennials would switch brands to one associated with a cause,” and that Millennials are “prepared to make personal sacrifices to make an impact on issues they care about, whether that’s paying more for a product, sharing products rather than buying, or taking a pay cut to work for a responsible company.”[6]

 “87% [of Millennials] would be more loyal to a company that helps them contribute to social and environmental issues”. [7]

Companies need to quickly adapt to their biggest customer group and work on establishing a reputation for environmental stewardship and social responsibility. Millennials want to work for and buy from companies with a bigger purpose, actively interested in “making impact’ on the world. They also expect companies to be open and honest about their environmental impact and supply chain. Millenials want sustainability and ESG to be a top priority. If you want to attract Millennials as employers, investors or consumers you cannot just have a single focus on the bottom line, but really need to focus on the contribution to sustainability and ESG factors.

The ESG Landscape continues to expand rapidly as more companies adopt sustainability practices into their business. Trends continue to show that it is no longer a question ‘if’ it’s worthwhile managing ESG data but ‘how’ to do it? Traditional processes, such as reporting on sustainability through policy documents and qualitative findings without proper strategic targets are no longer enough.

Read our next article to learn how to manage your sustainability impact in order to benefit your business.

With Turnkey Group solutions, you can measure and report on your ESG impact more effectively, identify ESG risks in your company, supply chain or investment portfolio and make the most out of your sustainability credentials. Find out more here.

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References:

[1] https://ecosphere.plus/blog/millennial-consumer-driving-force-corporate-sustainability/

[2] http://www.conecomm.com/news-blog/2016-cone-communications-millennial-employee-engagement-study-press-release

[3] https://www.forbes.com/sites/marissaperetz/2017/09/27/want-to-engage-millennials-try-corporate-social-responsibility/#273450706e4e

[4] Not Your Parent’s ESG. “Pensions & Investments, May 2017

[5] Sustainable Signals, Morgan Stanley, 2018: https://www.morganstanley.com/assets/pdfs/sustainable-signals-asset-owners-2018-survey.pdf

[6] ESG Insitutional Investor Survey: Performing for the Future. State Street Global Advisors, 2017

[7] https://www.unpri.org/pri/about-the-pri

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