ESG — an acronym for environmental, social and governance — has grown increasingly important to investors and consumers. ESG encompasses a range of business practices addressing climate and waste issues, human social impact and corporate governance (e.g. a company’s leadership and ethics).
For years, ESG reporting has been a voluntary effort. In 2021, however, the European Union adopted a new disclosure law, the Corporate Sustainability Reporting Directive (CSRD). And now the U.S. Securities and Exchange Commission (SEC) is contemplating its own measures.
But whether ESG becomes mandated or not, demand is increasing among consumers, job applicants, investors and vendors — which directly impacts your bottom line.
How ESG creates value
Research and analysis suggest ESG influences financial performance and value creation in the following ways:
- Talent: Many employees, and younger talent in particular, are interested in working for companies making a positive impact in the world. Having strong ESG practices in place can help attract top candidates and engage employees who want to know their work is making a difference.
Plus, pro-social labor practices (e.g., living wage, pay equity, diversity and inclusion, employee well-being) have benefits beyond attraction and retention. Research links these practices to innovation, productivity and greater shareholder value.
- Customer affinity: When surveyed, consumers report they’re more likely to buy from companies that value sustainability and social impact. There’s a growing pool of people willing to pay more for safer, healthier and environmentally conscious products. ESG efforts provide a fresh, compelling way to share your brand message, with stories your customers care about.
- Financial performance: You may find that relatively small changes — like moving to paperless job tracking, using recycled material, better waste diversion, energy efficiency upgrades — can deliver fast ROI and a noticeable impact on your bottom line.
- Risk management: Reduce regulatory and legal challenges and avoid fines and enforcement actions. Strong ESG practices can be a proactive way to ward off a variety of legal, financial and reputational risk.
For example, ESG protocols could help prevent improper waste disposal or inadequate controls that lead to consumer privacy breaches.
- Enterprise value: If your exit plans include a sale to private equity or a larger strategic buyer, ESG practices could drive up business value. While ESG may not play a large and consistent role in M&A just yet, dealmakers expect the focus to accelerate.
- Access and approvals: Good corporate citizens may be more likely to win public-private partnerships, licenses, resource extraction contracts, etc. Companies who demonstrate they are responsible stewards win public support to manage additional resources.
- Driving growth: A commitment to ESG can be a driving force for innovation and evolution. There are multi-trillion-dollar markets emerging in clean energy, electric vehicles, plant based proteins, compostable packaging, etc. Adopting and leading on ESG could be the path to the next great breakthrough.
- Data maturity: Flex your business analytics. The data you need to run a strong ESG effort will inform other priorities. The better you get at gathering and analyzing information, the better decisions you make – in any aspect of your operation.
Future-proofing your business
A strong ESG program can be an indicator that your company is managing its risks, reducing costs and proactively evolving to stay ahead of market demands. Investing is ESG is an investment in your company’s long-term health and resiliency.
Leverage the benefits of ESG with help from Wipfli
Experienced advisors can help create an ESG roadmap that fits the core values of your business. Whether you’re just starting an ESG program or want to formalize your efforts, we can help you establish meaningful metrics, define internal compliance protocols and build a reporting practice that creates real value. Contact us now or learn more on our ESG services web page.
Additional ESG resources: