Environmental, social, and governance (ESG) can impact the corporate financial performance and portfolios of a business very positively.
Well-managed businesses that take into consideration long-term risks and opportunities around ESG issues, and conduct efficient ESG research, usually outperform their peers.
As per a report, the top seven global risks that affect a business are all ESG risks.
Businesses need to venture into responsible investments in a way that integrates ESG into the investment process.
The traditional belief regarding ESG investments has been that ESG leads to less attractive investment outcomes for investors.
When businesses integrate ESG into their operations, it gives risk-adjusted and better results to the clients.
For example, according to research, businesses that scored high on a risk-response measure gave 1.4-2.7% higher returns during the initial stock market reaction to the COVID-19 crisis.
Here is how ESG impacts a company’s financial performance and portfolio returns.
Impact of ESG on a company’s financial performance and portfolio returns
A strong ESG proposition can safeguard a business’s long-term success and it is not just a feel-good exercise anymore.
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Paying attention to ESG does not create a drag on the value creation, it reduces the downside risk and creates higher equity returns for the business.
Here are the top five ways in which ESG impacts a business:
- Top-line growth: Businesses can venture into new markets and expand their operations into existing ones by maintaining a strong ESG proposition. When companies exhibit ESG-centric operations, the government trusts them with advanced access, approvals, and licenses. All this can be a catalyst to the company’s growth by putting more resources at its disposal. A strong ESG proposition helps businesses attract B2B and B2C customers by offering sustainable products. On the other hand, a weak ESG proposition leads the customers to lose faith in the company and perceive its products as unsustainable and unsafe.
- Cost reductions: Along with substantial growth, ESG can also lead to major cost reductions for a business. Companies can reduce their operating costs, like the cost of raw materials, up to 60% through ESG. Higher resource efficiency means an elevated financial performance for the company. ESG is a source of competitive advantage for companies and helps in redesigning equipment, improving the production line, tackling energy consumption, and recycling and reusing waste residue.
- Reduced regulatory and legal intervention: Companies can ease the regulatory pressure on them and gain a higher level of strategic freedom through ESG. Companies can also reduce the risk of adverse regulatory actions by the government when they implement ESG. Governments across the globe extend support to businesses that implement ESG. As per analysis, one-third of corporate profits are at risk if the government intervenes in a business’s operations. The impact of government regulations is different for different industries and can eat away a major portion of the business’s profits. ESG instills a sense of a higher purpose in the company’s employees, and positive social impacts of business activities create better job satisfaction and enthusiasm in employees.
- Investment and asset optimization: A company can enhance its investment returns through ESG by investing in sustainable and promising activities that are for the long-term and do not pose the threat of becoming redundant in the future due to environmental issues. Businesses that ignore ESG for a long time drain cash due to bad business practices such as using energy-hungry plants and non-deployment of waste. ESG investment requires funds, but waiting for too long to implement it can prove to be costlier in the long run. Repurposing the current assets of the company can help it stay ahead of the future curve by utilizing the company resources for future-oriented business activities.
The Final Word
Businesses can partner with experts for in-depth ESG research solutions that are based on ESG risks and opportunities analysis for different countries and different industries.
These expert analysts can offer ESG research and advisory services to the company. They also implement customized ESG, climate change, and sustainable business development mandates.
The ESG support offered by these expert partners includes impact assessment, company benchmarking, risk assessment, scoring, audits, etc. they also prepare the company and country-specific database frameworks, models, reports, and presentations.
Sustainability brings new opportunities to the doorstep of a company. It opens gates for newer markets, growth opportunities, and stakeholders’ trust in a business.