Making the case for investment

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Companies on the fence about investing in Environmental, Social, and Governance (ESG) initiatives typically want to know three important things: 

1. Will the investment return value to shareholders in the long run?
2. Where will the supposed cost savings and efficiencies gained from ESG investment come from?
3. How will investing in ESG improve the company’s profile and make it more competitive?

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Why ESG?

Broadly speaking, ESG is a framework of ideas about how companies should be run in terms of their (E)cological impact (carbon footprint, waste management), (S)ocial responsibilities (e.g., worker health and safety, community involvement, philanthropy), and (G)overnance (anti-corruption, transparency).

By committing to ESG principles, a company demonstrates to its investors, customers, employees, and other stakeholders that the organization is committed to sustainable, ethical, socially responsible business practices.

More recently, however, investing in ESG has also proven to be a smart business decision—one that helps make companies more competitive, resilient, and profitable. According to the Thomson Reuters 2024 State of Corporate ESG report, 71% of C-suite and functional corporate leaders surveyed now view ESG investment as a source of competitive advantage, and 82% say they believe that ESG’s role in corporate performance will continue to grow—up from 72% in 2023.

The business case for ESG investment

Despite skepticism about ESG from some industry quarters, the business case for ESG investment is relatively easy to make. That’s because adopting ESG principles isn’t just the socially responsible thing to do; ESG initiatives also incentivize companies to operate in ways that reduce costs, increase efficiency, mitigate risk, and protect against future disruptions, especially in the supply chain.

Sustainability vs. unsustainability

For example, one of the key metrics in any ESG program is sustainability. Though the environmental side of sustainability gets most of the attention because of the growing risks related to climate change, there are social and governance components as well, all of which combine to create a company’s sustainability profile.

The difference between an unsustainable company and a sustainable one is the difference between a match and the sun. A match may burn brightly for a while, but it will eventually go out, whereas the sun replenishes its energy and shines constantly, no matter what.

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Sustainability, in other words, is the key to long-term business survival.

Rather than focusing on what ESG compliance might cost in the short term, what business leaders should be asking themselves is this: Can my company operate profitably in the long term without depleting or destroying the resources upon which it depends—natural, human, or otherwise?

Alternatively, corporate leaders can simply ask themselves, “How might operating sustainably benefit the organization and save money?”

What are the benefits of sustainability?

Lower operating costs: Sustainable enterprises tend to use fewer resources and use their resources more efficiently. ESG data can drive lower energy costs, less waste, and more efficient operations—all of which saves money in the long run.

Lower compliance costs: Companies dedicated to ESG compliance have less risk of regulatory penalties and are better positioned to stay ahead of future regulatory changes.

More resilient supply chains: More companies—multinationals especially—are requiring their suppliers and vendors to adhere to ESG practices, ensuring that supply chains are not compromised by forced labor, corruption, illegal sourcing, or other factors that might compromise the integrity of the chain.

Improved risk assessment: ESG data requirements encourage companies to analyze a broader range of risks—environmental, economic, social, political, etc.—and to do so with much more deliberate specificity than traditional risk assessments, protecting the company from a more diverse array of possible threats.

Higher margins: According to the NYU Stern Center for Sustainable Business, consumers will pay up to 27.6% more for a product marketed as “sustainable” versus a competitive product that isn’t. And according to a well-known survey by Nielsen and McKinsey, two-thirds (66%) of consumers indicate a willingness to pay more for products associated with positive social and environmental impacts.

Opportunities for innovation: Almost every business sector has room for more sustainable, eco-friendly products and services—and the company that creates them first reaps the benefits.

Enhanced brand reputation: Customers—especially younger ones—are more likely to support businesses dedicated to sustainability and social equality. A reputation for ESG commitment can also attract customers and investors who value brand loyalty and mutual trust.

Employee morale/productivity: Companies with strong ESG commitments tend to attract employees who share the company’s values and believe in the company’s mission. The result: improved loyalty, less turnover, better overall morale, and increased productivity.

Risks of ignoring ESG factors

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Another factor to weigh when considering ESG initiatives is that dismissing or ignoring ESG requirements comes with its own risks.

On the regulatory front, more government agencies around the world are requiring companies to report ESG-related data—especially for greenhouse gas emissions and other forms of industrial waste—so compliance in those areas is becoming mandatory. Furthermore, failing to protect the supply chain from forced labor or corruption can lead to stiff penalties and reputational damage, not to mention sourcing disruptions.

Companies that ignore ESG also run the risk of losing market share to competitors that feature more eco-friendly options or are perceived to be more socially responsible. Likewise, companies that pretend to care about sustainability—through a dubious practice known as “greenwashing”—can experience a harsh public backlash and possible fines if their sustainability claims are proven to be false or misleading.

Common misconceptions and concerns about ESG

Embracing ESG as a core business principle is not without controversy, however, and concerns about its efficacy do occasionally surface.

The most common criticism of ESG is that its requirements are too complicated. And yes, ESG programs do ask companies to track, record, and report more data than they might otherwise—but plenty of ESG-specific software tools are available to help automate ESG data-collection and reporting, streamlining the compliance process and ultimately saving time in the long run.

Other critics argue that the benefits attributed to ESG are difficult to quantify because isolating the impact of ESG on a company relative to all other possible factors is impossible. This may be a valid criticism as well—then again, it is also impossible to know how a successful, ESG-compliant company might have fared during the same period if ESG considerations were absent.

ESG and long-term value creation

The strength of ESG initiatives is that they help companies create long-term value for shareholders while also aligning the company’s mission and values with positive contributions to society and protection of the environment. Over time, other benefits accrue (e.g., stakeholder loyalty, economic efficiencies, opportunities for innovation) and the cumulative reward is a more sustainable, resilient business model—one better prepared to withstand the shocks and disruptions of an increasingly uncertain world.

In the end, however, the decision to embrace ESG or not boils down to a decision to prioritize long-term value creation over short-term solutions that may or may not be in the organization’s best interests over time. Balancing short-term financial goals with long-term ESG objectives can be a challenge, of course, but in many industries, companies that proactively adopt ESG standards also have an opportunity establish themselves as leaders in sustainability and social responsibility, which can be an additional competitive advantage.

And remember, companies that invest in ESG-related technology are also investing in a powerful source of additional data—data that can be used to drive time-and-money-saving operational efficiencies and provide leaders with strategic intelligence that might otherwise be overlooked.

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