The 5 Avenues of Value Creation that ESG Opens Up

Opinion piece: Johan Hanekom 

Regardless of the industry in which your business operates, environmental, social, and governance (ESG) concerns will necessarily take a major role in the way it conducts its operations. In this article, we explain why this is a unique opportunity to create more value instead of being a challenge to overcome.

If you look at it, you’ll quickly realise why. Environmental concerns are unavoidable because your company’s activities will be directly and indirectly affected by environmental factors and affecting the environment. Social concerns are just as important—how your company interacts with, affects and is affected by the social dynamics of the communities it is surrounded by is of extreme importance. Your employees and labour dynamics make the first line of social engagement regarding which your social policies are constantly under check. 

On the other hand, although this article doesn’t primarily focus on that subject, governance concerns are also crucial. Governmental agencies, the media, and society as a whole will look at how your company complies with laws and regulations, how it handles transparency, and how it views the very concept of social accountability.

These concerns could intuitively be regarded as further obligations to meet, turning into more hurdles to do business in an already challenging and highly competitive scenario. However, we’re pointing out that they represent quite the opposite: case in point, they play into a truly trillionaire opportunity.

30 Trillion Reasons to Spot the Opportunity

In the most recent years, sustainable investments grew exponentially. Currently accounting for US$30tn, sustainable investment opportunities and businesses attracting capital and investors grew 68%t since 2014. 

In a nutshell, in less than 10 years, the sustainable industry—which actually touches multiple industries with businesses that are committed to being sustainable—experienced impressive growth that keeps expanding. And this isn’t temporary either: the economic importance of sustainability will only collect more strength—and it’s time for your business to pick up some of its strength to grow along with it.

The Five Avenues of Value Creation

1. Leveraging Social Impact to Grow

Having a well-structured and well-executed ESG policy is not only good in itself—it’s also good for the company and how society rewards it for the concerns it expresses in a pragmatic way.

Multiple companies in different fields—including in the complex world of mining—have seen their adherence to clear and tangible ESG policies yield impressive results. From getting more contracts to earning the trust of public bodies, these companies experienced measurable benefits for their businesses precisely because they delivered measurable benefits to the communities that they are close to.

In a more specific context, ESG-strong companies can actually close more sales and generate more revenue. Observed consumption behaviours backed by multiple studies show that, whenever consumers are presented with sustainable products that perform as well as conventional products, they’re prepared to prefer them, even when they cost up to 5% more than their ordinary counterparts.

This leads to more sales and to a higher profit per sale, which is even making companies that were traditionally operating in socially and environmentally complex scenarios transition to sustainable products to capitalise on ESG compliance and genuine pro-active sustainable policies that are clearly very rewarding.

2. Preventing Waste Also Reduces Costs

What if your company’s customers rewarded you for spending less? It may sound strange, but that is what the entire concept of preventing waste embodies.

Sustainable-driven consumers—who, these days, are dynamically becoming the majority of consumers—want to see businesses using up fewer resources than before. Case in point, packaging, which traditionally was tied to strong branding and heavy costs, has undergone important transformations. Consumers will prefer businesses that save on packaging and will reward brands that show environmental responsibility for downsizing their packaging output. In other words, they’ll pay you to cut down on packaging costs—because that also represents cutting down on waste and environmental impact.

This goes well beyond packaging, though. By converting its entire fleet of 35,000-vehicles to electric or hybrid engines, FedEx has managed to cut fuel costs—and thus fuel consumption—by 50 million gallons. Consumers applauded it because the use of energy is an extremely sensitive ESG concern that societies are feeling—so reducing energy consumption is as good for the planet and society as it is for your bottom line.

3. Organically Befriending Government Agencies 

By simply enacting strong ESG policies that create a positive environmental and social impact, and that display good governance, companies are organically drawing the goodwill and trust of the government. 

On the one hand, this tends to lead to a less intensive oversight because there is trust in the good intentions of a business that tangibly follows these principles. On the other hand, governments award more opportunities to businesses that they see that are committed to helping the world to walk in the best possible direction, positively affecting multiple actors.

From savings generated by less government intervention and the pressure this typically entails, to the possibility of receiving subsidies to support sustainable transitions, depending on the industry in which your company operates, going thoughtfully sustainable may pay off very significantly also in this respect.

4. Impacting Your Workforce 

Having an engaged and motivated workforce means having more productive employees that will seek to professionally thrive along with playing a decisive role in the success of your company.

Several studies show that companies that rank highly in employee satisfaction categories consistently sell more, generate higher profits, stronger growth, and better shareholder returns. Showing your employees that you care about them as individuals and that you support their career progress as much and strive to make them feel connected to the company is of paramount importance.

At the same time, making your employees feel that they are part of a company that cares about the world it conducts its business in also affects the way their work. Feeling that their job is as good for their career and employee as it is for society and the planet makes them feel that they belong to something that is greater than just producing a good balance sheet.

Companies that are still weak in the field of ESG, on the other hand, tend to see a workforce lacking motivation and a sense of belonging. Companies that outsource many tasks to external teams, losing track of how those segments interact with ESG goals, also compromise their alignment with sustainability goals that they could otherwise leverage.

That is why large corporations with massive workforces, which rely on extensive networks of third-party suppliers, are seeking to track ESG-focused practices throughout their entire chains. They know that any weak link of the chain could lead the chain to break—whereas making sure the chain has integrity keeps it strong and transparent.

5. Sow a Sustainable Culture, Reap Higher Rewards

As you design and execute plans for the future of your company, re-assess every new decision from the ESG-oriented point of view. Adhering to environmental and social sustainability concerns today will be expressed in two significantly important ways tomorrow: 1) you’ll dodge the dramatic impact of future heavy regulatory frameworks for non-sustainable business practices, so you’ll be saving on coping with forced regulatory changes and limitations; and 2) you’ll be positioning your company today in a truly sustainable way to capitalize on it tomorrow in more ways than one—consumers and stakeholders in general are paying a great deal of attention to the best actors in the economy, and they are increasingly interested in getting behind them.

Being proactive, though, is the only effective way to ride these trends. A wait-and-see approach will be extremely negative because sustainable trends are scaling up faster than you can imagine. Waiting today to confirm trends and make decisions will mean missing out on important opportunities tomorrow. Leading in taking innovative ESG-focused steps today that every stakeholder can identify and appreciate will mean reaping higher rewards tomorrow.

Make it Tangible and Measurable

Don’t just commit to using nice-sounding words as part of your company’s PR. It’s exceptionally important that you carefully choose tangible ESG goals for your policy that are clearly tied to your company’s line of business. It’s just as important to make them as tangible and intuitive as possible.

Cutting down 30% of your company’s plastic or fuel usage, or replacing plastic with recycled organic materials in packaging, are measures of change and positive impact that consumers and stakeholders, in general, can clearly observe.

There are multiple other examples of specific and practical ESG-focused policies that your company can announce and deliver on, and the value-creation consequences that will add to your company’s bottom line are clearly there to be collected. Just keep in mind that the more easily identifiable, verifiable, and measurable they are, the higher will be the impact they will deliver—namely in terms of the value that your company will financially pick up from them.