When companies care about environmental, social and governance issues, especially in the C-suite, the result isn’t simply an improved reputation. ESG also correlates with higher profits, and quickly.
That’s according to new findings from the research arm of tech and business consultancy Infosys Ltd.
Infosys research found that a 10-percentage-point increase in ESG spending correlated to a 1-percentage-point increase in profit growth. This occurred relatively quickly: 41% of respondents surveyed said they experienced a return on their ESG investment within a two- to three-year window.
ESG efforts include looking at how much renewable energy a company might purchase and at cutting greenhouse-gas emissions, even going all the way to net-zero emissions, and as a result, lowering energy bills. Other efforts might focus on bringing more women or people of color on as board members and can even inform the “G” in ESG — governance. Good governance might include transparency with shareholders or linking CEO compensation to progress in the “E” and the “S” areas.
“Research shows that a 10-percentage-point increase in ESG spending correlates to a 1-percentage-point increase in profit growth. ”
The Infosys report found that the higher up the corporate management chain ESG was embraced and addressed, the more lucrative its payoff.
“One of the most surprising findings involved the effects of embedding ESG responsibility across top leadership ranks,” Jasmeet Singh, the global head of manufacturing with Infosys, told MarketWatch.
“We found that companies with the best financial performance had certain elements in common: an ESG committee on the board, a chief diversity officer and a chief sustainability officer. In addition, they had vested their chief sustainability officer with the authority to clear capital expenditure for ESG initiatives,” Singh said.
“It looks like the companies with the best financial trajectories are the ones that are going all in on ESG,” he added. “This suggests that the time for half measures has passed.”
The report found that nearly all — 90% — of responding executives said their ESG spending led to moderate or significant financial returns, and that 66% experienced ESG returns within three years.
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The report acknowledges that despite ESG’s clear link to profit growth, budgets are likely to be an obstacle in the current economy. This is worrisome, as companies need to devote more financial resources and to make changes to their operating model to achieve ESG goals and sustain profit growth, the researchers said.
MarketWatch asked Singh if the research had turned up whether corporate decision makers were feeling pressure, mostly in political circles, to turn back what’s been labeled “woke capital.” Texas and Florida have both launched efforts to ensure that state money is not invested using ESG principles.
“There’s this implied assumption there that ESG is good for people but bad for business. As a result, it’s treated as a compliance matter,” said Singh. “Executives don’t always invest in ESG like they would in something that they consider part of their core business.”
“ ‘For some companies, ESG will continue to be a burden if they treat it as a compliance requirement instead of an opportunity for value creation.’”
This can only change if more executives see the positive bottom-line results from ESG, and that will come through more insightful communication and better strategies, period, Singh said.
“For some companies, ESG will continue to be a burden if they treat it as a compliance requirement instead of an opportunity for value creation,” he said. “There are several avenues for value creation — for example, in the manufacturing sector, applying circular-economy concepts like recycling and remanufacturing can create an additional value stream. Or selling energy monitoring and optimization services to end customers can create another value stream.”
Read: Barron’s: BlackRock Gets More Backlash on ESG. What It Means for the Stock.
The research found that almost all companies are interested in aligning their ESG goals with their supply chain, especially as more companies are expected to account for their Scope 3 greenhouse-gas emissions. The Securities and Exchange Commission is contemplating rules that will require listed companies to report Scope 3, or the emissions created up and down the value chain from resource extraction to customers driving to a store.
However, less than one-third of companies share ESG expectations or requirements for suppliers. Only 16% say they renegotiate contracts based on ESG data from those in the supply chain. This indicates a clear need for more leadership in the supply chain, as well as incentives to share ESG data, the report said.
“ ‘Often, employees are voting with their feet. They will either refuse to work for a company that doesn’t take ESG seriously, or at the very least, a firm’s tepid ESG stance will tilt the scales against that firm.’”
Business consultants also increasingly say that in recruiting, hiring and retaining employees, candidates often prioritize how “green” a company is in its operations.
“Analysis of reported financial data and company priorities determined that businesses that concentrate their ESG initiatives on employees — more often than on customers — have higher profit growth,” said Singh.
“It’s clear that people want their employers to take climate change and other environmental issues seriously. And, increasingly, they want their companies to protect customer and employee privacy and create an inclusive workplace,” he said.
“Often, employees are voting with their feet. They will either refuse to work for a company that doesn’t take ESG seriously, or at the very least, a firm’s tepid ESG stance will tilt the scales against that firm.”
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