Five ways of value creation through ESG Proposition

Value Creation with ESG proposition

Concerns about the environment, society, and governance (ESG) are entwined with businesses. It is, thus, vital that businesses have a strong ESG proposition that can create value. Here’s a framework to comprehend the five essential ways it can accomplish this. But let’s first take a quick look at each of the components of ESG individually:

• The environmental criteria in ESG, or the “E,” refers to your company’s energy consumption, waste output, resource requirements, and any resulting effects on living things. Last but not least, E includes climate change and carbon emissions. Every business utilizes resources and energy, and every business both influences and is influenced by the environment.
• S, or social criteria, focuses on the connections and standing your firm has among the organizations and people in the localities where it operates. S involves diversity and inclusion, as well as labor relations. Every business functions within a larger, more diversified society.
• G, or governance, is the internal framework of practices, checks, and policies your business uses to manage itself, reach wise judgments, abide by the law, and satisfy the demands of external stakeholders. Every business, which is a legal entity, needs governance.

Five links to value creation

The five links do not guarantee that each connection will be applicable or applicable to the same extent in every situation. Rather, they offer a method to think about ESG in a more systematic approach. Others will be more prevalent in specific regions, while some are more likely to occur in specific industries or sectors. Nevertheless, regardless of a company’s business strategy or location, all five should be taken into account. Owing to the potential value creation brings, businesses cannot afford to ignore any element. 

1. Top Line growth

Companies can enter new markets and grow in existing ones with the aid of a compelling ESG proposition. When governmental bodies have trust in the corporations, they are more inclined to grant them access, permissions, and licenses that open up new growth prospects.

For instance, there are more financing and investment for a sustainable infrastructure project in Emerging Asia, placing great emphasize on ensuring sustainability efforts are commercially viable. Additionally, mining has clearly benefited from superior ESG execution. Consider gold, an expensive commodity that should, on balance, yield the same rents for the corporations that mine it regardless of their ESG claims. Nevertheless, a significant study discovered that corporations with social engagement initiatives that the general public and social stakeholders saw as useful had an easier time extracting such resources, without lengthy planning or operational delays. Comparing them to rivals with smaller social capital, these enterprises earned valuations that were clearly higher.

ESG can influence customer preference as well. According to a McKinsey study, shoppers are willing to pay to “go green.” It was found that up to seventy percent of consumers surveyed on purchases made in multiple industries, including the automotive, building, electronics, and packaging categories, said they would pay an additional five percent for a green product if it met the same performance standards as a nongreen alternative. Even though there can be significant variations in practice, such as customers who refuse to pay even one percent more.  Businesses have acknowledged that prospects for expansion and business were the driving force behind the launch of their respective sustainability initiatives. 

2. Cost reductions

ESG can significantly lower costs as well. Among other benefits, implementing ESG successfully can aid in reducing rising operating costs (such as raw material costs and the true cost of water or carbon), which, according to McKinsey study, can have a 60 percent negative impact on operating profitability. Another metric  (the amount of energy, water, and waste used in relation to revenue) was devised to examine the relative resource efficiency of businesses across different industries, and they discovered a strong relationship between resource efficiency and financial performance in the same report.

The first step in generating value comes with identifying the potential, as is the case with each of the five connections that contribute to the production of ESG value.  Take 3M, which has long recognized that proactively addressing environmental risk may result in a competitive advantage. Since launching its “pollution prevention pays” (3Ps) initiative in 1975, the corporation has saved $2.2 billion by preventing pollution upfront through product reformulation, enhanced manufacturing techniques, redesigned equipment, and recycling and reuse of industrial waste.

3. Reduced regulatory and legal interventions

4. Employee productivity uplift

By fostering a sense of purpose in employees, a strong ESG proposition can help businesses recruit and retain high-caliber talent, boost employee motivation, and boost overall productivity. There is a good correlation between happy employees and profitable returns to shareholders. For instance, according to research by Alex Edmans of the London Business School, over a period of more than 25 years, the businesses that made Fortune’s list of the “100 Best Companies to Work For” experienced annual stock returns that ranged from 2.3 to 3.8 percent higher than those of their competitors. Additionally, it has long been noted that employees who feel connected to their work and satisfied with their jobs perform better. An employee will be more motivated to operate in a “prosocial” manner if they feel that their job has a stronger impact on others who benefit from it.

5. Investment and asset optimization

A compelling ESG offer has the potential to improve investment returns by channeling resources toward opportunities that are more sustainable and more attractive (for example, renewables, waste reduction, and scrubbers). Additionally, it may assist businesses in avoiding stranded investments, which are financial commitments that may not bear fruit due to longer-term environmental concerns (such as massive write-downs in the value of oil tankers). Always keep in mind that to take an appropriate account of investment returns, you need to start from the appropriate baseline. When it comes to ESG, it is essential to remember that a do-nothing approach is often an eroding line rather than a straight line. This is something that must be kept in mind at all times.

For instance, continuing to depend on energy-intensive facilities and equipment can cost money in the long run. While updating your processes may demand significant expenses, waiting it out may prove to be the most expensive alternative of all. The rules of the game are changing: Regulatory responses to emissions will probably have an impact on energy costs and may particularly have an impact on the balance sheets of sectors that use a lot of carbon. Additionally, new restrictions on a variety of enterprises, many of which may need to catch up, will be imposed bans or restrictions on single-use plastics or diesel-powered vehicles in city centers. Repurposing assets now is one approach to get ahead of the curve for the future, such as turning failing parking structures into more in-demand purposes such as residences or daycare facilities. This trend is starting to appear in cities that are revitalizing themselves.

Foresight is directly correlated to financial success, and capitalizing on the positive side effects of sustainability may open up new doors to good investment possibilities.

A solid ESG proposition links value creation in five critical ways.

New to this concept? Take advantage of this framework and look into how Elitez drives our ESG  Reach out to out team on how our services can create value for your business.