Let me ask you a question;

Why should the CEO of a company care about climate change? Or care about ESG (Environment, Society and Governance)? What's the point of using valuable resources to focus on this? Why would you have a team focus on ESG? It's not merely because CEOs are all nice people, or magically all care about the environment. 

The answer is that ESG means business. The big idea behind ESG is not merely about doing the right thing or being ethical, it's about ensuring the long-term viability of an organisation. Investment management companies have been analysing ESG factors for the past two decades because they recognise that businesses that are strong in environmental, social, and governance aspects are more likely to thrive and be reliable investments. These companies are less likely to face insolvency in the short term and are better prepared to tackle challenges ahead (including the effects of climate change).

Your take-home; 

ESG isn't just about reporting or philanthropy; it's a commercial necessity that CEOs and business leaders must embrace to ensure their companies thrive in the coming years.

 

ESG Is More Than Reporting, its Commercial 

ESG goes beyond simply reporting metrics or engaging in corporate social investment (CSI) or corporate social responsibility (CSR) initiatives. It is more than engaging in recycling, volunteering your staff to building houses for the underprivileged, and sponsoring education. While these practices are valuable, ESG is fundamentally a commercial consideration.

It is about doing what it takes to ensure your business remains viable in the long term.  What does this mean in practical terms? It translates into winning more customers, controlling costs, obtaining favourable interest rates on bank loans, and garnering higher valuations from investment firms.

 

Winning Customers

Customers today are increasingly concerned about how companies behave on the social front. Any company is at risk of alienating its customers if it seems to treat society with disrespect. Some examples could be engaging in unfair trade practices, rewarding executives excessively, employing clever tax strategies to evade taxes, engaings in poor employment practices or adopting AI and workplace automation that hurts society by causing unemployment or infringing on privacy or increasing inequality. ESG requires a company to consider not only its shareholders but also its stakeholders, including its customers.

Environmental considerations are equally important to customers. If a company relies heavily on fossil fuels for distribution or uses environmentally harmful ingredients in its products, customers are likely to turn against it. ESG mandates that companies take responsible actions to protect the environment, which can ultimately win the loyalty of environmentally conscious consumers.

ESG forces businesses to look beyond their shareholders and consider a broader spectrum of stakeholders. This includes customers, employees, and even governments. When a company adopts strong social policies and demonstrates its commitment to broader stakeholder interests, it is more likely to receive support from these groups, contributing to its long-term success.

 

Winning Employees

Companies have to be very aware that there will be a significant portion of people who want to work for an ethical company. If a company isn't doing much in the ESG space, or at least pushing forward a strong story on what it's doing from an ESG perspective, then it is going to be difficult to get the best employees out there and difficult to retain people.

A Reuters survey done on employees found that 72% were concerned about environmental ethics, 83% said their firm wasn't doing enough, and 65% said that they were more likely to work for a company with strong environmental policies. With human resources being widely acknowledged as having the potential to give companies a competitive advantage, it's imperative for companies to be able to attract the best talent and retain them. A good ESG story with a strong ESG strategy can achieve this. 

 

Financing and Business Valuations

If you are an executive in a company and you know your business might needs some financing in the next 5 years, then you have to think carefully about the view of commercial banks in relation to ESG factors. Banks are going to use ESG data on your company to determine if they will lend to you, and on which terms.  Or potentially you want to sell the business or you just need to keep your share price high (if your share price falls, they might get rid of me). Investments management company will place a high value on your business if you are perceived to be doing good on the ESG front.  What is the value they'll put on the company? From that point of view executives might care about ESG.

 

In summary, without strong ESG practices, companies may struggle to attract and retain top talent, lose customers, face regulatory challenges, and find it difficult to secure favourable financial terms. In contrast, businesses that prioritise ESG are better positioned to thrive in the long term, as governments, banks, and investment management firms place higher value on their sustainability efforts. ESG is not just about saving the planet; it's about securing the future of your business.

 

Join a free ESG Taster Class on 30 November 2023 at 6PM. Book your free ticket here.