Home Guest Columns Why Is ESG Important? Navigating Challenges, Embracing Sustainability

Why Is ESG Important? Navigating Challenges, Embracing Sustainability

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Stefan Güldenberg

Environmental, social, and governance (ESG) issues are increasingly prominent in the decision-making processes of investors, consumers, and employees. With societal and environmental issues at the top of the global agenda, the ESG movement has surged in popularity and more people than ever before are considering the wider implications of their choices.

However, the rise of ESG issues in the minds of investors and consumers has not been unchallenged. Last year, the backlash against ESG reached fever pitch when Tesla was removed from the S&P 500 ESG Index. It was cut from the indices over concerns about employer safety and worker conditions. By way of a response, the outspoken EV maker’s CEO, Elon Musk, called ESG a “scam” and “part of a leftist agenda”. Goldman Sachs, Deutsche Bank, and BNY Mellon have also been caught in the crosshairs of regulators for allegedly making misleading claims about the presence of ESG factors in their investment processes.

However, despite some of the world’s biggest organizations bemoaning ESG, it’s regarded in most quarters as a simple case of growing pains. The reality is that although some of the world’s largest organizations might not like it, ESG is being driven by market forces, so it’s well and truly here to stay.

What is ESG?

Environmental, social, and governance, known simply as ESG, is a set of standards that measures an organization’s impact on the environment, society, and how accountable and transparent it is.

ESG initiatives help organizations improve their sustainability efforts, reduce their carbon footprint, and have a more positive impact on society. These initiatives can help to position the organization for long-term success and improve its investability.

ESG Pillars

Environmental—This focuses on the steps an organization takes to minimize its impact on the environment, from the delivery of its products and services to the supply chain and its operations. It can implement more sustainable and ethical practices by:

  • Reducing energy usage.
  • Switching to renewable energy sources.
  • Developing zero-waste products and sustainable packaging.
  • Reducing carbon emissions.
  • Reducing waste and encouraging recycling.

Social—The social aspect is all about how the organization can impact its consumers, employees, and wider society in a positive way. This is achieved by implementing fair and ethical business practices, such as:

  • Promoting equality in the workplace.
  • Preventing abuses in the supply chain.
  • Securing customer data and ensuring products are safe.
  • Prioritizing employee safety and wellbeing.
  • Paying workers fairly.
  • Investing in the wider community.

Governance—Governance refers to the organization’s decision-making and reporting processes. It concerns the ethics and transparency of organizational behaviors as well as decisions around the social and environmental aspects of ESG. Examples of good governance include:

  • Accurate and transparent financial reporting.
  • Communicating the organization’s strategy and operations clearly.
  • Making business leaders and managers accountable.
    Underpinning decisions with ethics.
  • Promoting diversity within the leadership team.
  • Putting ESG at the heart of your organization can help you reduce costs, increase profit margins, strengthen sustainability, and increase stakeholder satisfaction. All of which can ultimately become a powerful competitive advantage.

Sustainability is Becoming the Expectation

Over the last few years, ESG initiatives have shifted from being “nice to have” to a “way of doing business” and there are many reasons why. First, there’s considerable pressure from consumers. Although there are differences based on age and income, overall consumers are making more sustainable choices. One study found that 78 percent of global consumers believe sustainability is important and want to live more sustainable lives. The European Union and the United States are building on that consumer pressure by adding sustainability requirements to their legislation.

There’s also a growing expectation among employees that the organizations they work for are sustainable. According to an IBM study, 70 percent of employees find employers with sustainability programs more appealing, while 80 percent want to help organizations reach their ESG goals. Meanwhile, a study in the U.K. found that 77 percent of employees want their employer to be more transparent about their environmental impact, and just 15 percent believe that their employer’s ESG initiatives are always impactful or genuine. The demand for sustainability from employees is most prevalent among younger workers, with a KPMG survey finding that one-third of Millennials and Gen Z reject job offers based on weak environmental, social, and governance initiatives.

Investors are also keeping a close eye on sustainability. According to a PwC report, global asset managers are forecast to increase their ESG assets under management to $33.9tn by 2026, up from $18.4tn in 2021. We are also seeing the same shift among retail investors, with 82 percent of global retail investors interested in investing in companies that value social and environmental progress. According to a 2022 EY report, 78 percent of investors think companies should address ESG issues even if it leads to a short-term fall in profit.

ESG Creates Value

One of the greatest attractions for organizations is the potential for value creation from ESG initiatives. Although the added value will come in different forms depending on the initiative and sector, the following benefits present a compelling case.

Revenue growth—A strong ESG proposition can help organizations tap into new markets and attract new B2B and B2C customers with more sustainable products and services. For example, strong sustainability performance could help organizations access government contracts and licenses. ESG can also boost consumer demand and profit margins, with research suggesting that customers are willing to pay more to go green.

Cost savings—Reduced energy consumption, water intake, and waste are just a few of the ways ESG can help organizations save on costs. Research has revealed a strong correlation between the resource efficiency of organizations in various sectors and financial performance. It found that the organizations making the biggest savings on energy, water, and waste were also those that have taken their ESG strategies the furthest.

Increased Employee Productivity

We’ve already discussed how strong ESG initiatives can act as a powerful employee attraction and retention tool, but they can also be an effective motivator. Studies show that organizations with a positive social impact correlate with higher job satisfaction among employers. Employees who have a sense of satisfaction and a connection to their work perform better. That translates to an increase in profitability, with a study showing that the organizations on Fortune’s list of the “100 Best Companies to Work For” generated between 2.3 percent and 3.8 percent higher stock returns per year. Human Resources executives play a key role in establishing policies that please investors (with dividends, ROI, etc.) whilst placing ESG at the core of an organization’s DNA.

Reduced regulatory interventions—A stronger ESG proposition can also help to ease regulatory pressure on organizations and reduce the risk of reputational damage. Companies that take sustainability seriously are less likely to be on the receiving end of state intervention and more likely to receive government support. Given the potential risks to corporate profits from government regulation, that makes it a difficult benefit to ignore.

The High Cost of a Do-Nothing Approach

The prevailing market forces mean that a do-nothing approach to ESG could lead to an eroding bottom line. This type of market shift and innovation will inevitably cause some growing pains, but the demands of consumers, employees, and investors will continue to drive ESG forward, and organizations of all kinds would be wise to follow suit.

If you want to understand how ESG is impacting the hospitality industry, check out this article on ESG in Hotel Real Estate.

Stefan Güldenberg is Full Professor and Academic Director Graduate School EHL Hospitality.

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