Sustainability is clearly at the center of the agenda for the corporate world. But has it really taken center stage? If one follows the career discussions in Sustainability, the focus has remained largely around compliance (with a few exceptions). This is clearly an opportunity lost – Sustainability needs to move from ‘Compliance’ to ‘Value.’ Does it meet the objective of being a good corporate citizen – clearly, the answer is ‘yes.’ Does it need to rapidly move beyond that – absolutely – and the time is now.
This reminds me of the path taken by the integration of “Technology” into mainstream business. Starting with mid and back-office functions like finance and accounting to really leverage the power of technology to drive business outcomes took decades. As the share of e-commerce started increasing, companies realized that technology decisions had to become an integral part of corporate strategy. The technology could actually drive growth and increase efficiencies and business resilience. The current pandemic has accentuated this even more with technology moving to the CEO and the extended C -suite table and not restricted to the CIO.
The transition in technology may have taken a few decades, but the world that we live in is forcing change at a much faster rate. The ESG dynamics have transformed at an astonishing pace. They hit you in the face from all directions – from the Government and its policies on carbon/diversity/governance to customers, employees, and investors demanding more accountability to ESG standards. The topic has certainly become mainstream, and it is up to us to decide how we want to use it – as a mere cost center and as a lip-gloss to board agenda or as a “Value Driver.”
There are strong reasons why Sustainability should be used as a value driver. While being a good corporate citizen is certainly one reason, another important reason is that it just makes good financial sense. Several research studies have demonstrated a strong correlation between sound ESG practices and improved corporate financial performance (one such study is “ESG and financial performance: aggregated evidence from more than 2000 empirical studies” by Friede, Busch & Bassen). The following can explain the connection between ESG and financial performance.
- Including ESG in business discussions is a sign that the company is nimble, not complacent, and adapting continuously based on its changing environment. Most successful companies exhibit these traits.
- ESG issues present several risks to a company. Recognizing these potential risks in evaluating strategic initiatives helps build resilience and preparedness for the future. For example – companies such as Microsoft levy an internal carbon tax on their business units to force them to reduce their emissions. A carbon tax is definitely a risk that most of us should be getting ready for (see March 2, 2021, WSJ article Oil Trade Group Is Poised to Endorse Carbon Pricing – WSJ). If we accept this as a risk, would it not be better to direct our business to prepare for it – and invest in technologies that can reduce our carbon footprint?
- Companies with an open mind to ESG can find opportunities in the ESG landscape too. Being more sustainable means using your natural resources more efficiently – and will lead to cost reduction. Many companies have been able to bring down their energy bills while searching for ways to reduce their carbon emissions. Retrofitting Empire State Building to make it “greener” had a payback of just five years through reduced energy and operating costs while also improving leasing attractiveness. Several companies have benefitted from investing in technologies to improve energy efficiency – and these technology innovations happened only when the companies understood and questioned their carbon emissions.
Another reason for considering ESG as a value driver is that investors and lenders increasingly want this. Demand for ESG funds has been rising, and funds with reduced ESG risk have outperformed other funds and benchmarks (Sustainable Equity Funds Outperform Traditional Peers in 2020 | Morningstar). Similarly, in debt funding, there are more and more examples of banks offering lower interest rates to companies adopting superior ESG principles. One of the initial examples was a revolving credit facility to Philips in 2017, where the interest rate was linked to the business’s sustainability rating. ESG ratings and analytics are becoming more sophisticated and will be able to differentiate between ESG factors being used only for compliance vs. value drivers.
Sustainability has already been a key value driver for leading corporates across many sectors, and they have shown that staying true to core ESG principles makes good business sense. Isn’t it time for everyone else in the industry to follow?
About the Author
Neeta Ramnath is a business and management consultant, with a strong passion for ESG. She has led a start-up from concept to execution, worked with consulting firms such as Accenture and Bain, and consulted on transportation, energy, and real estate projects worth over $10B in the US and India. She is also studying Corporate Sustainability at the Harvard Extension School.