5 ways ESG creates value for companies, beyond virtue signalling

Published in

Social Innovation Japan

5 min readNov 23, 2022

Strong ESG performance can strengthen talent acquisition, open up investment opportunities, cut costs, increase revenue and reduce regulatory risk.

“We know we should do some kind of ‘good’ as a company, but we can’t quite grasp the Return on Investment beyond just virtue signalling, and it’s hard to get internal buy-in…”.

This is the kind of remark I hear a lot from business leaders and entrepreneurs when it comes to Environment, Social and Governance (ESG) performance.

In fact, I often hear people mentally decoupling their core business from their ‘social good’ practice. But the fact is, ESG is an integral part of any business — not separate.

ESG is not only for financial institutions and investor analysis — ESG data also serves as a measure of how well a company is run and is essential for risk management, enabling businesses to plan for compliance, enhance disclosures, and build risk mitigation roadmaps to manage relevant threats in advance.

It helps business leaders ask questions like: How efficiently is water used in the supply chain? How healthy and satisfied are the employees? How transparent are governance processes? And so on.

So, here are 5 ways in which investing in a company’s ESG performance can directly contribute to the company’s long-term value.

1. Hiring and Retaining Top Talent

New grads and younger professionals are increasingly choosing ethical, sustainable employers over higher wages. For example, a 2021 survey showed that 51% of US MBA students would take lower pay if the company was a strong environmental performer. Furthermore, 49% of Gen-Zs and 44% of millennials said that they had made career choices based on their personal ethics, according to this Deloitte survey. With increasing competitiveness for top talent, neglecting ESG performance can lead to losing out to competitors. Furthermore, purpose-driven companies have 40% higher levels of workforce retention than other organizations.

2. Investment Opportunities & Access to Capital

Demand for sustainable investment opportunities is outstripping supply, according to a 2022 PWC report. Over $500 billion flowed into ESG-integrated funds in 2021, contributing to a 55% growth in assets under management (AUM) in ESG products — and this growth is expected to continue in 2022 and beyond. Investors — from individual retail investors to pension funds — are allocating an ever-growing proportion of their portfolios towards sustainable strategies as they seek both financial returns and positive impacts on society. For example, Gartner research finds that 85% of investors considered ESG factors in their investments in 2020, and 84% of institutional investors in Europe plan to increase their ESG investment allocations. This high demand presents ESG-integrated businesses with major investment opportunities and access to capital.

3. Cost Reduction

Any business can find cost-saving opportunities in their supply chains, including improving energy efficiency, reducing resource waste (e.g. cutting unnecessary packaging), and reducing water consumption. For example, Unilever cut costs by $1.5 billion through sustainable sourcing since 2008, and Starbucks’ “Greener Stores” initiative is expected to save the company $50 million over the next 10 years through reduced water and energy consumption. Finding and optimizing key points in a company’s operational footprint can directly contribute to bottom-line growth.

4. Revenue Growth

Creating better, more sustainable products can drive customer acquisition and open up new market opportunities. For example, consumers across all generations — from Baby Boomers to Gen Z — are happy to spend more on sustainable products, and nearly 90% of Gen X (those born between 1965 and 1984) consumers said that they’d be willing to spend an extra 10% or more on sustainable products and services.

5. Regulatory Risk & Social License to Operate (SLO)

Being a good corporate citizen — from ensuring the well-being of employees to investing in local communities — can minimise the risk of regulatory pressures and adverse government action, such as fines. It can also ensure the company’s Social License to Operate (SLO) — the ongoing acceptance of a company’s practices and operating procedures by its employees, regulators, and the general public. Conversely, neglecting ESG considerations can spell disaster for businesses; just look at Barrick Gold’s gold mine in Papua New Guinea, for example. After allegations of human rights abuses and environmental harm, Barrick was forced to cease operations in 2020 when the government declined to renew its permit. Similarly, the Manhattan Minerals Corporation was forced to withdraw its plans to build a massive mine in Peru after mismanaging relations with local stakeholders, resulting in demonstrations, road blockades, and a referendum rejecting the company’s proposals.

Enhancing ESG performance is not just about “doing the right thing”; it directly contributes to the company’s bottom line and long-term feasibility, and helps managers fulfill their fiduciary duty to shareholders, while also delivering value to their broader stakeholders.

Companies can no longer afford to make surface-level commitments and actions related to social and environmental good that are additional to their core business; these considerations must be strategically integrated into the core of what they do.

While many companies struggle to take decisive and meaningful action for positive impact, time is running out. In the words of former Unilever CEO Paul Polman, whose words echo the findings from the latest IPCC Report, “The cost of inaction for companies is now higher than the cost of action”.

Thanks for reading! For more on topics related to social business and social innovation, see some of my other posts here:

For more on me and my work in social entrepreneurship and social innovation: www.robin-lewis.com