By Steve Rochlin, CEO of IO Sustainability | 13 September 2018
“ ESG [environment, social, governance] morphs into a strategic driver of performance when companies stop treating it as a compliance and PR exercise and start adopting a four-step process.”
Steve Rochlin is the lead author of the Project ROI series and CEO of IO Sustainability, a research and management consulting firm specializing in environment, social and governance (ESG) strategy, valuation, measurement, and stakeholder relationship management. Here he discusses how ESG can be utilised as a strategic driver of performance and to increase financial value. Sherah Beckley, Thomson Reuters Sustainability.
New research finds that if companies integrate and strategically align ESG into the business, it can serve as a driver of superior performance.
The research comes from two reports in the “Project ROI” series (with our partners at Babson College and ACCP). Collectively the reports have reviewed over 500 studies and looked at over one hundred corporate case examples across industries. The compelling results find that when done well, ESG has the potential to:
- Boost share price by as much as 6%
- Increase sales by as much as 20%
- Increase productivity by 13%
- Reduce employee turnover by as much as 50%
- Enhance reputation value that increases market cap by as much as 11%
- Protect against disruptive risks equivalent to an insurance policy worth as much as 7% of market cap
- Reduce the cost of equity, borrowing, and financial risk.
ESG morphs into a strategic driver of performance when companies stop treating it as a compliance and PR exercise and start adopting a four-step process.
1) FIT ESG to core strategy, products/services, and operations.
Consider two examples from the global food manufacturing industry. In the first, a company sees that its most important ingredient in over 80% of its products is increasingly under threat.
Climate change is disrupting supply.
The company finds that small farmers in developing countries are aging out as their children seek their fortunes in cities. Who can blame them when farmers receive pennies for back-breaking work and are victimized by corrupt brokers and public officials? In response this company has designed a responsible sourcing strategy that helps farmers become more productive and profitable, improves conditions in rural communities, and advances R&D to make the ingredient more resilient. The company promotes its responsible supply chain work to its retail customers, consumers, investors, and employees. The approach has reduced costs as suppliers improve productivity and quality; increased sales as retailers and consumers choose the company’s more responsible products; and impressed shareholders who see the company managing risks and costs.
In the second example, a company increases its philanthropy to support basic community needs. The company does little to promote its efforts or measure impacts on communities.
Clearly the better fit between ESG and business needs comes from the first example, which both drives performance and tangibly improves the well-being of those in need.
2) COMMIT resources to address material ESG issues and areas of “Fit.”
C-Suites are growing increasingly frustrated over the ever-expanding demands of ESG. One C-Suite executive explained, “If we keep expanding what we do while keeping our headcount fixed the inevitable result is that our ESG programs’ quality will suffer and it will blow up in our face!” High performing ESG companies therefore commit to put the majority of their resources, focus, and effort into areas that will drive value and meet vital stakeholder needs.
3) MANAGE and measure ESG performance according to well-defined KPIs.
Leading companies integrate their business and ESG metrics. For example, GeSI finds a reinforcing relationship between adoption of information and communications technology (ICT), and progress on the UN Sustainable Development Goals. In fact, the SDGs represent a nearly $2 trillion market opportunity for the ICT industry. Companies such as AT&T, Dell, Verizon and others are setting goals to use their technology to enable customers to reduce their carbon emissions far beyond the ICT industry’s own footprint.
4) CONNECT and communicate with, involve, and engage investors, customers, & employees.
BlackRock CEO Larry Fink letter to CEO’s in 2017 has begun to change the game. Where investors where once silent on ESG, they are now developing a set of questions they plan to actively monitor. The CEO of a global industrial company talks to investors about ESG proactively. The CEO identifies ESG mega-trends that will affect the company’s growth and shares how the company is responding. The company has seen its share price vastly outpace its competitors.
While few data exist, our own benchmarking suggests that large global companies allocate anywhere from $100 million to well beyond $300 million annually on ESG activities. We have begun to apply a diagnostic tool that identifies whether a company’s ESG approach has value creating potential. If so, we can then quantify the likely financial return.
Companies that adopt “Fit, Commit, Manage, and Connect” can see their ESG expenditures return a billion dollars or more over reasonable payback timelines.
Yet in too many instances companies are not prepared to generate these results. We’re increasingly using this diagnostic process to help investors identify companies set up to approach ESG as a performance driver.
Project ROI finds that companies can develop clear steps, processes, and strategies for ESG to meet societal impact aspirations while delivering tangible financial value to the company.