As investors increasingly seek genuine ESG leaders from a limited supply of such companies, businesses that embrace ESG and demonstrate tangible success can realize a lower cost of capital.
Impact on operations
A coherent ESG strategy does not just impact the cost of capital. According to EY-Parthenon analysis, which measured the profitability of the top sustainable corporations globally based on Corporate Knights’ 2020 Global 100 ranking, sustainable companies outperformed their industry peers on gross profit, EBITDA, EBIT and net profit metrics.
Other studies agree with this finding. The Oxford University metastudy, From the Stockholder to the Stakeholder, highlighted that for 88% of companies studied, solid ESG practices resulted in better operational performance. In addition, 80% saw stock price performance positively influenced by good sustainability practices.
There are many reasons that can explain this performance. For instance, the increasing influence of ESG factors on consumers’ purchasing decisions has allowed sustainable companies to charge higher price premiums on their products and services. The EY Future Consumer Index found that consumers are displaying increased loyalty and affiliation to brands that demonstrate a clear commitment to their purpose and ESG principles. A majority of the consumers covered in the study stated that they consider ESG factors when making a purchasing decision.
At the same time, a focus on sustainability has often pushed firms to pursue operational and process efficiencies, therefore supporting profitability. These include eliminating waste, simplifying supply chains and cultivating an innovative culture that proactively advocates reinventing existing processes to achieve true circularity.
“Go big” on the ESG focus to help maximize benefits
Despite the overwhelming evidence in favor of incorporating ESG into corporate strategy, the push to prioritize sustainability has proven challenging for corporate strategists as ESG considerations are wide-ranging and require trade-offs that may be hard to quantify. The topic can often be complex, contradictory and even confusing.
Multiple studies show that investors look for focus. Companies that direct their efforts in a concerted manner on the most material ESG aspects for their sector have historically demonstrated a higher alpha than peers that do not. This is illustrated below.
Companies also need to be very clear to all stakeholders on their level of ESG commitment. While managing ESG trade-offs is not easy, “going big” on the ESG focus can be worth it, depending on a company’s individual parameters. Achieving these results is not just a matter of investment but also of thoughtful communication of the company’s ESG commitment to all stakeholders, including capital markets.
By leveraging the long-term value creation metrics identified by the World Economic Forum’s International Business Council, businesses can better demonstrate their contributions toward sustainable, long-term value creation across the full ESG strategy development process from vision definition to implementation.
Long-term value requires companies to have a strategic lens for defining how a business creates, delivers and measures value across the planet, people, governance and prosperity. Having a good understanding of the drivers of future long-term value will prove invaluable in a corporate ESG journey.
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Summary
Companies are under increasing pressure from consumers, regulators and investors to consider ESG factors in their business. To succeed, companies need to embark on an ESG journey and embed ESG considerations into their corporate strategy. They also need to leverage the appropriate long-term value creation metrics to better communicate their ESG commitment to stakeholders.
