Profits through Ethics
Why ethical business is an economic obligation today
Our decisions influence companies, society and the environment. Ethical business entails making decisions that benefit not only us but also others and the world. This is not just about legal compliance, but also about social and environmental responsibility. In an interconnected world, it is important to recognise responsibility and act accordingly.
🇨🇭| 🇩🇪 | 🇦🇹 Link zur Übersetzung in deutscher Sprache auf ethicalprofit.ch.
An ethical business culture is characterised by transparency, empathy, respect, integrity, honesty, diversity and environmentally friendly practices. This leads to better profits. Investing in ethics pays off in the foreseeable future. It is not only morally, but above all commercially relevant to consider external costs (true cost accounting) so that markets can function and prices can reflect reality.
CSR reflects a company’s internally defined efforts to take responsibility for doing good in the world on its own initiative. ESG reporting aims to make a company’s efforts measurable and objectively comparable from an external perspective. Depending on the perspective, both are suitable frameworks for measuring success.
This applies in particular to public interest entities. PIEs (Public Interest Entities), as these companies have been referred to since the introduction of Directive (EU) 2022/2464 (CSRD), are already gaining experience.
Leading the Way: The Role of PIEs
PIEs are entities like credit institutions or insurance companies that trade on regulated markets. Or they are designated by a Member State as relevant to the public on the basis of their activity, size or importance.
Internationally active Swiss PIEs provide practical examples of how ethics are strategically applied.
- Novartis is committed to improving global healthcare with ‘Global Health’ and has developed innovative programmes to promote access to medicines in developing countries.
- Roche implements initiatives to promote diversity in the workplace and is a leader in employee development.
- Companies such as ABB are embarking on ‘Industry 4.0’ with ‘ABB Smart Power’ and have reduced their operating costs while increasing productivity through their focus on renewable energy.
- Nestlé has enshrined in writing its ‘commitment to operating in an environmentally sustainable way and enabling shared value creation’ and has implemented successful initiatives to reduce water consumption and promote sustainability in the supply chain.
The practical implementation for SMEs
Questions remain unanswered: What does this mean for SME? Do they need to take a different approach? Are there already benchmarks for SME? To what extent can profits be realised in addition to all the effort involved?
For SME, the challenge lies in finding a pragmatic approach to CSR and ESG. Identifying benchmarks within the new European Sustainability Reporting Standards (ESRS) offers a structured pathway to compliance and strategic advantage. ESRS are binding for companies that have to prepare sustainability reports and require detailed reports in accordance with the Corporate Sustainability Reporting Directive (CSRD). Large corporations and similar companies must also submit sustainability reports. The introduction of the new reporting is staggered depending on the size or characteristics of the company and is specified by EU-regulated standards.
According to the German Federal Ministry of Labour and Social Affairs (BMAS), the CSRD reporting requirements will initially apply to a limited group of companies from 1 January 2024 and will be successively expanded:
- for financial years starting from 1 January 2024: public interest entities with more than 500 employees,
- for financial years beginning on or after 1 January 2025: all other large companies under accounting law
- for financial years starting from 1 January 2026: capital market-oriented SMEs, unless they make use of the option to defer until 2028.
The markets demand it
Ethical business practices have a demonstrable effect on the success of all companies, regardless of total assets, net sales and number of employees:
- Building a positive brand image
- Increasing trust and customer loyalty
- Improving employee satisfaction and loyalty
- Cost savings and long-term stability
- Increased competitiveness
Ethical behaviour in companies is more than just a moral imperative. It is now a business necessity.
Two recent studies with facts and figures
Studies like the Swiss Sustainability Benchmark Study 2023 and the Bain study from 2019–2021 provide empirical evidence linking ethical behaviour with enhanced corporate performance, underlining the economic benefits of sustainability and diversity initiatives.
Swiss Sustainability Benchmark Study 2023
The study looks at the importance of sustainability for Swiss companies. It shows that companies are increasingly recognizing the need for sustainability, but many are still at the beginning of their sustainability efforts. They are faced with vaguely formulated sustainability goals and the challenge of measuring them. Motivators for sustainability efforts include social responsibility, potential cost savings and increasing employee satisfaction. The study also emphasizes that customers prefer sustainable solutions, but do not always (want to) accept this with correspondingly higher prices. Companies face the challenge of communicating their sustainability efforts credibly without being accused of ‘greenwashing’. The recommendation is to identify and implement short-term measures, while anchoring sustainability in the corporate culture and creating commitments are important in the long term.
Bain study shows positive ESG results
The Bain study uses figures from 2019–2021 to analyze how environmental, social and governance (ESG) measures correlate with economic performance. Companies with positive ESG scores show a strong link to successful corporate results. Research has shown that these companies not only achieve positive results for society, but are also financially successful. The study highlights that companies with a focus on aspects such as renewable energy, employee satisfaction, diversity and inclusion experience higher revenue growth and improved profit margins. It suggests that companies and investors assess their ESG maturity and then take steps to make meaningful changes that will in turn generate financial returns and accelerate the ESG transition.
In numbers:
- Companies that rank in the top 25 % of their industry in terms of gender diversity in their leadership team show annual revenue growth of about 2 percentage points above those in the bottom quartile. Their EBITDA profit margins are also 3 percentage points higher than those of companies in the bottom group.
- Companies with highly satisfied employees record up to 5 percentage points higher sales growth over a three-year period compared to companies with lower employee satisfaction. Profit margins are also up to 6 percentage points higher than in companies with lower employee satisfaction.
- Companies that are at the forefront of sustainable procurement have higher profitability. Their profit margin is 3 percentage points higher than companies that do not focus on the ethical environmental and labor practices of their suppliers.
- 53 % of large listed companies achieve top scores for carbon management in the EcoVadis ratings, compared to only 35 % of large private companies.
Take change into your own hands
If you are keen to effect change within your area of responsibility, I am here to assist. Contact me to find out more about my consulting services.
Sources
Novartis. (n.d.). Global Health. Available at: https://www.novartis.com/ch-de/patientinnen-und-patienten/global-health. (accessed 09.01.2024).
Roche. (n.d.). Diversity, Equity & Inclusion. Available at: https://www.roche.de/unternehmen/was-uns-antreibt/diversity-inclusion. (accessed 01.05.2024).
Elektroniknet. (2024). Investments pay off: Sustainability through Industry 4.0. Available at: https://www.elektroniknet.de/automation/industrie-40-iot/nachhaltigkeit-durch-industrie-4-0.213046.html. (accessed 09.01.2024).
Nestlé. (n.d.). The Nestlé Corporate Business Principles. Available at: https://www.nestle.de/unternehmen/grundsaetze/nestle-unternehmensgrundsaetze. (accessed 09.01.2024).
Swiss Sustainability Benchmark Study 2023 (2023). Available at: https://digitalcollection.zhaw.ch/handle/11475/27458. (accessed on 09.01.2024).
Bain & Company. (2023). Do ESG Efforts Create Value? Available at: https://www.bain.com/insights/do-esg-efforts-create-value/. (accessed on 09.01.2024).
Directive (EU) 2022/2464 (CSRD). Available at: https://de.wikipedia.org/wiki/Richtlinie_(EU)_2022/2464_(CSRD).
DIHK. (n.d). Corporate Social Responsibility. Available at: https://www.dihk.de/de/themen-und-positionen/wirtschaftspolitik/corporate-social-responsibility. (Accessed on 01.05.2024).
CSR in Germany. (n.d.). Corporate Sustainability Reporting Directive. Available at: https://www.csr-in-deutschland.de/DE/CSR-Allgemein/CSR-Politik/CSR-in-der-EU/Corporate-Sustainability-Reporting-Directive/corporate-sustainability-reporting-directive-art.html. (accessed on 09.01.2024).
Udemy. (2022). Corporate ESG and Sustainability: Doing Well and Doing Good (Layli Miller-Muro). Available at: https://www.udemy.com/course/corporate-esg-and-sustainability-doing-well-and-doing-good/learn/lecture/32885750#overview. (accessed 09.01.2024).
