The mantra “doing good is good business” is now a common phrase in corporates’ strategy meetings and reports.Businesses are beginning to realize that the integration of environmental, social and governance (ESG) factors enhance performance. Traditionally, ESG issues had been considered non financial implying their material significance on the bottom line as insignificant. But the fall of the once leading Canadian mining company “Tahoe Resources” following a revocation of its license due to a violation of rights of indigenous people in Guatemala, demonstrates that ESG issues have financial effects on a firms sustainability. The halt of production in 2017 at the Escobar mine caused a decline of its share performance down by 28% in Toronto and more than 33% in early trading in New York.
Today the ESG landscape is diversifying beyond the supply side to the demand side. Consumers continue to shift towards sustainable brands. A recent survey by Nielsen reports a surge in demand for natural products. Consumers are changing their consumption habits and are even willing to pay a premium for products that are sustainably produced. The consumers are constantly calling upon business to act responsibility with the environment. But the most significant trend is the Gen Z’s favour for ESG. Gen Z will be the CEOs, employees, and consumers of tomorrow, so their favour for ESG lays a foundation for the future of sustainability. With all of the various sustainability factors and evolving trends in play, companies need to understand whether and how these broader sentiments play out for their specific brand and consumer profile.
In the area of investment, institutional investors are as well calling a relocation of capital, away from less sustainable portfolios towards more sustainable portfolios. Shareholders of Shell and Exxon Mobil recently voted to demand the oil giants to have sufficient interventions to reduce their carbon footprints. Similarly, the asset owners are demanding more accountability on ESG performance from the companies they invest in. The MSCI World ESG Index reports that companies with good ESG momentum outer performing both in developing and emerging markets. Such trends are imperative to greatly accelerate the transition towards low carbon and cleaner, healthier and socially more inclusive business practices; the underpinning a sustainable future.
A commonly cited obstacle to companies adopting ESG measures is the perception that it will increase costs. Often improved sustainability is not valued in internal capital allocation decisions since the goals of corporate sustainability teams and financial teams are not well-aligned. The intangible nature of social and environmental issues brings a materiality challenge with companies lack metrics to account for external ESG costs.
To address such dilemmas, companies could adopt globally recognized sustainability initiatives that help integrate and measure ESG performance. For example, in 2015, UN launched 17 broad Sustainable Development Goals for 2030 that address ESG issues including poverty, energy, gender equality and ecosystems protection, among others. The global development framework provides a benchmark for incorporating ESG in business strategy. The Global Reporting Initiative (GRI) provides ESG metrics that companies could use to evaluate their performance and shape their ESG performance.
ESG incorporation must be deliberately built into how the business churns. But companies need to be cognizant of the fact that the returns of ESG incorporation may not show in the short run. It requires leaders to peer into the future and see patterns that may not yet exist or be solidly recognized. There’s a vast opportunity for businesses to take a lead on sustainability. Will your business be one of those?