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Five Value creators of ESG

Value of ESG

ESG (Environmental, Social, and Governance) principles are integral to modern business practices, with each element interconnected. For instance, social criteria often intersect with environmental and governance aspects when companies aim to align with environmental regulations and broader sustainability concerns. While our primary focus lies in environmental and social criteria, governance cannot exist in isolation. Effective governance involves not only adhering to the letter of the law but also embracing its spirit. This entails preempting violations, ensuring transparency, and fostering dialogue with regulators instead of merely submitting formal reports.

In recent times, proactive thinking and action regarding ESG have gained greater importance. The US Business Roundtable’s August 2019 statement reaffirmed businesses’ commitment to multiple stakeholders, including customers, employees, suppliers, communities, and shareholders. In sync with this shift, ESG-focused investing has experienced significant growth, with global sustainable investments surpassing $30 trillion. This surge results from increased societal, governmental, and consumer attention to the broader impact of corporations, as well as recognition by investors and executives that a robust ESG framework safeguards long-term success. The substantial investment inflow underscores that ESG transcends being a passing trend or a mere goodwill gesture.

While the case for a robust ESG proposition is compelling, the precise mechanisms linking ESG to financial viability require further exploration. ESG’s financial relevance becomes evident when considering its impact on cash flow through five key mechanisms. Leaders should incorporate these levers into their ESG strategies and also understand the interpersonal dynamics that underpin their effectiveness. A brief look into the five key mechanisms:

1. Top-line Growth

A robust ESG proposition opens doors to new markets and bolsters a company’s position in existing ones. Superior ESG performance garners trust from governing authorities, facilitating access, approvals, and licenses for growth opportunities. Consumer preference for sustainable products also contributes to revenue growth, with many customers willing to pay extra for eco-friendly alternatives. Companies like Unilever and Neste have successfully capitalized on sustainability to boost sales. As per results of studies done on over 2000 organizations, a strong ESG policy led to positive returns for almost 63& companies. As per statistics and reports, consumers have openly voted to remain loyal to companies that have good ESG policies and support SDGs.

2. Cost Reductions

Effectively implementing ESG strategies can lead to significant cost savings. Combatting rising operating expenses, such as raw materials and resource costs (e.g., water and carbon), is a major advantage. Companies with strong resource efficiency and sustainability initiatives often outperform their peers financially. Examples include 3M’s pollution prevention program and a water utility’s lean initiatives. FedEx’s transition to electric or hybrid engines has reduced fuel consumption, yielding substantial savings. For example, 3M’s proactive approach to environmental risk management, exemplified by its “pollution prevention pays” (3Ps) program introduced in 1975, has yielded substantial savings, totalling $2.2 billion. This initiative involves reformulating products, enhancing manufacturing processes, equipment redesign, and recycling waste. FedEx’s plan to transition 20 percent of its 35,000-vehicle fleet to electric or hybrid engines has already reduced fuel consumption by over 50 million gallons.

3. Reduced Regulatory and Legal Interventions

A strong ESG profile can enhance a company’s strategic freedom by reducing the risk of adverse government actions. It can also foster government support. Regulation’s impact varies by industry, but typically, a significant portion of corporate profits is at risk from state intervention. Strong ESG performance can mitigate these risks, particularly in sectors like pharmaceuticals, banking, and technology, where government intervention is prominent. Banks, for example, have approximately 50-60% profits at stake due to regulations, and hence ESG policies tend to play an important part.

4. Employee Productivity Uplift

A compelling ESG proposition aids in attracting and retaining high-quality employees, motivating them through a sense of purpose and connection. Studies show that employee satisfaction positively correlates with shareholder returns. Companies recognized for their positive workplace culture, like those on Fortune’s “100 Best Companies to Work For” list, often yield higher stock returns. Encouraging a sense of higher purpose among employees enhances motivation and overall performance. As per report, 41% of employees said they would continue in employment if their employer had a commitment to low emissions and 62% considered ESG as a strong commitment by their organization. By 2030, 75% of workforce is expected to be millenials, a generation that places a high value on ethics, ESG, sustainability etc. In such a scenario, ESG will likely matter more than ever.

5. Investment and Asset Optimization

A robust ESG proposition enhances investment returns by directing capital toward promising and sustainable opportunities, such as renewables and waste reduction. It also helps companies avoid stranded investments due to long-term environmental issues. Ignoring ESG considerations can erode financial performance, as regulatory responses to emissions and changing consumer preferences impact costs and operations. Repurposing assets and staying ahead of sustainability trends can yield substantial financial benefits. 85% of asset managers say that ESG is high priority and attracts better investment opportunities. China’s fight against air pollution will generate $3 trillion in investment opportunities by 2030, spanning air-quality monitoring, indoor air purification, and cement mixing industries.

Ultimately, ESG can create value if proposed and implemented the right way. A few tips to ensure the right impact would be:

1. Be specific in your communication: Understand that the causes that inspire individuals can vary greatly, even within your executive team. Large companies often have numerous ongoing social, community, or environmental projects, so focus on a clear and concise message to avoid confusion and ensure alignment.
2. Practicality is key: CEOs should emphasize value creation as the core message, backed by hard metrics that demonstrate how ESG priorities align with the business model. For example, metrics like output per electricity use, waste cost per employee, or revenue per calorie can provide tangible evidence of ESG’s impact on value.
3. Be realistic and acknowledge the risks:¬†Recognize that mishandling ESG efforts can lead to significant value destruction. Do not overemphasize. Evaluate the potential value at risk from external engagement and prepare for scenarios that could impact operating profits. In today’s digital age, unforeseen challenges can arise suddenly, even from a single social media post. Take ESG seriously and address downside risks proactively to avoid potential disasters.

ESG is a long term investment

Addressing ESG risks openly and transparently can boost long-term value, even if it entails short-term challenges. For instance, Dick’s Sporting Goods CEO Ed Stack’s decision to restrict gun sales in 2018 resulted in an estimated $150 million loss in sales, around 2% of annual revenue, and the expectation of alienating some customers. However, the company’s stock price increased by 14% in just over a year after the change. MiniMines is dedicated to combating climate change through innovative cleantech solutions. Our focus is a sustainable Lithium-ion (Li-ion) battery recycling technology. We’re committed to earning carbon credits, reducing CO2 emissions, and developing cost-efficient, carbon-neutral processes for precious commodity extraction, all in the fight against global climate change.

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