Companies demonstrating good environmental, social and governance (ESG) practices frequently outperform their competitors at almost every level. Why, then, is ESG so often viewed as a burden or as presenting additional regulatory obstacles that hinder company growth?
Pam Shearing, Managing Partner of the London-based consultancy Fulcrum, and Farheen Ishtiaq-Stansfeld, Senior Associate Solicitor at Fulcrum, examine these misconceptions and consider whether ESG practices are simply a risk management necessity, or rather a missed opportunity for growth.
Risk management v opportunities for growth
Let’s take the ‘G’ of ESG. Good governance instils a legally and ethically robust business culture, providing firm foundations upon which an organisation can establish trust with its stakeholders. Mishandled governance and governance failures often undermine good environmental and social policies, leaving an organisation vulnerable to both regulatory scrutiny and reputational damage – often resulting in commercial losses. As such, evaluating ESG issues, both in terms of risk and opportunity, is now critically important for all organisations, not just in relation to short-term profitability, but also long-term viability.
Those who are considering the opportunities posed by ESG are effectively reassessing what success means for a business from the perspective of all stakeholders, rather than just equating business success as short-term profit for shareholders. They are exploring an organisation’s reputation and the image it portrays in the global market, and these organisations are most likely to derive value from ESG.
How does ESG provide business opportunities?
Strong ESG initiatives and companies that can demonstrate a real commitment to evolution in this area will find their route to operational and market expansion more likely. Through practical demonstration of an organisation’s commitment to ESG, businesses will prove that they are ethically sound, helping to build trust in the market and become a more attractive option for prospective business partners. This will subsequently enhance organisational growth against competitors.
Employees are becoming more focused on their company’s commitment to environmental and social matters, calling upon their own employers to demonstrate stronger commitment. Similarly, new market talent is increasingly drawn to companies that adopt a strong practical commitment to social and environmental issues. Together, this can create a more motivated workforce, helping to drive performance productivity. As ‘the great resignation’ sweeps industries around the world, being the company of choice for disenfranchised employees can truly set you apart from your peers.
3.Reduced operational costs
Designing and implementing good ESG processes can often help reduce operational costs. For example, environmentally friendly operations may benefit from government grants, or be less costly in the long-term, providing a competitive advantage in tandem with reaping reputational rewards.
4. Reduced regulatory scrutiny
It is almost impossible to quantify the related reputational damage resulting from ESG-related regulatory intervention, the impact of which is often felt years after a financial penalty is paid. Getting things right now by exploring long-term ESG compliant procedures will leave companies less exposed to regulatory scrutiny on ESG matters.
5. Stakeholder satisfaction
Investors now routinely analyse information on a company’s ESG performance in order to understand its future prospects, and strong ESG initiatives will enhance investment returns in line with their own ethos. As more and more companies, organisations and sectors are recognising the importance of ESG, the opportunities for growth are endless.
Accountability in the ESG field is increasing in prominence, and therefore staying ahead of the curve, and building a reputation as an organisation with a strong practical commitment to ESG, will be key in outperforming competitors. Accordingly, organisations need to move away from viewing ESG as simply another risk factor to navigate, and instead shift their mindset towards viewing ESG as an invaluable opportunity to break into new markets and stand out from business competitors. ESG offers huge opportunities for organisations who recognise its potential for business, and those that recognise this ahead of time will undoubtedly gain a competitive advantage.
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