Doing well by doing good:

five ways ESG creates value

A focus on ESG not only helps corporations build a better world: it is the key to unlocking growth and profitability

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Why have environmental, social and governance (ESG) issues risen up the agenda for so many corporates? Research from ServiceNow, the intelligent platform for digital transformation, reveals that 57 per cent of C-suite leaders now regard ESG as a top priority for their organisation. Many are, no doubt, motivated by conscience and responsibility. But it has also become increasingly clear that a focus on key ESG issues can drive performance and support value creation.

“ESG is not just good for the planet and for people; it is also good for profit,” argues Edua Dickerson, Vice President of ESG and Finance Strategy at ServiceNow. “ESG has implications for operations, for our supply chains, and, fundamentally, for our ability to do business effectively.”

ESG is not just good for the planet and for people; it is also good for profit

Edua Dickerson,
Vice President of ESG and Finance,
ServiceNow

Independent research supports this argument. One recent project from the NYU Stern Center for Sustainable Business looked at close to 300 studies on the impact of ESG; 58 per cent of them identified a positive correlation between attention to ESG and strong financial performance. NYU Stern’s researchers cited “increasing evidence that business strategy focused on material ESG issues is synonymous with high-quality management teams and improved returns”.

ESG and financial results

Positive and neutral investment results dominate

Source: NYU Stern Center for Sustainable Business

Figure 01: In hundreds of studies of companies, 58% of them found a link between ESG and financial performance. Companies with strong ESG credentials were also likely to perform better financially.

Critically, argues Catherine Howarth, chief executive of ShareAction, a group that campaigns for investors to increase their focus on ESG, growing numbers of businesses recognise the potential benefits of looking beyond the short-term bottom line. “The purpose of ESG is to build wealth without undermining our collective security,” she says

In practice, that means recognising the common good. The work required to address key ESG issues overlaps with the work that is necessary to drive efficiency and profitability. Increasingly, innovation and ESG are one and the same. Businesses with good ESG performance often achieve innovation by putting in strong supporting infrastructure; their systems and processes enable them to see more – and therefore do more.

ESG advocates argue that businesses which excel in this regard can look forward to positive impacts across five separate value drivers:

Brand value and reputation

In a world where customers increasingly want to do business with companies whose values they share and admire, strong ESG performers will secure loyalty and repeat business. Research published by the World Economic Forum suggests 70 per cent of consumers now buy from brands they perceive as sharing their personal values.

Brand value

Tendency to purchase brands that reflect personal values - % agree

Source: WEF

Figure 02: Research shows people want to buy from companies whose brands reflect their own values. In the UK, for example, as many as two-thirds of consumers take such factors into account when shopping.

Recruitment and retention

In a tough market for talent, where many people express a desire to work for organisations with a sense of purpose, employers unable to articulate a positive ESG story to their workforce can expect to lose out. One recent CNBC survey found that 56 per cent of people would not even consider working at an organisation they did not feel shared their values.

56%

would not consider working for a company that does not share their values

Supply chain strength

Suppliers are now focused on their own ESG footprints and anxious to do business with organisations that are making progress. No business exists in a vacuum – it must work with all stakeholders, including suppliers, to drive change. Indeed, research from Normative suggests 90 per cent of carbon emissions are accounted for by supply chain activities.

90%

of CO2 emissions are supply chain related

Regulatory and political compliance

Regulators and policymakers are pursuing clear agendas in areas such as climate change and social justice and are therefore determined to demand better ESG performance. Organisations that do not meet such demands will face consequences such as regulatory sanction and political pressure. The Principles for Responsible Investment group points out that ESG policy interventions have more than tripled over the past decade.

Cumulative number of policy interventions worldwide per year

Source: PRI

Figure 03: Governments and regulators are becoming more interventionist. The number of new laws and regulations relating to ESG issues has tripled over the past decade.

Access to capital

Investors and lenders recognise the potential for superior returns from providing capital to organisations with good ESG credentials – and their own stakeholders are demanding in this regard too. The funding available for stronger and weaker ESG performers is likely to diverge rapidly; global ESG funds have now raised more than $2.5tn worldwide according to McKinsey research.

2022 Global sustainable fund assets

Europe accounted for vast majority of ESG funds

Source: McKinsey

Figure 04: Investors are pouring huge sums into funds that invest in companies with good ESG credentials, particularly in Europe. Sustainable investment funds in Europe are now worth more than $2tn.

In aggregate, these value drivers are hugely significant. One recent study found that companies that place importance on ESG factors have seen their revenues grow 9.7 per cent over the past three years – more than twice the 4.5 per cent achieved by those that have underplayed key ESG issues.

How, then, to maximise value creation through a focus on ESG? ServiceNow’s Dickerson argues this requires a robust governance strategy for ESG, with clear lines of reporting and accountability, and tools and technologies that support connectivity. “ESG initiatives are often siloed and manual – there are impressive things going on across the enterprise but it can be challenging to join the dots,” she says. “It is important to be able to pull all that information together, not just for outward trust, but also for inward alignment.If you do that, you can create a leapfrog effect.”