ESG is not just a means to measure efficiency in achieving various sustainability goals. It can be a key driver for generating new income flows.
By Delma Iris
The growing urgency of ESG
ESG, an acronym for environmental, social, and governance sustainability measures, addresses the urgency to change our industrialized economy into a more sustainable one. Given the immediate need for action and public demand for change in the face of climate threats, many economists, investors, and companies are paying closer attention to ESG issues. BlackRock, one of the largest exchange-traded fund (ETF) providers, created six new ETFs in 2020 and hired a head of sustainable investing as part of its equity investment team.
This type of news from an industry leader has ripple effects. One effect is that retail and institutional investors now pay more attention to companies that follow sustainable business best practices. Companies are therefore scrambling to improve their sustainability profiles as reflected in their ESG scores.
ESG and cost reduction
There are many ESG best practices that any business, regardless of industry or size, can apply to reduce the cost of operation and mitigate or eliminate practices that damage the environment and people. A companies’ common reaction is to adopt a cost-saving strategy to implement improved sustainability practices. This strategy focuses on reducing consumption and associated resource costs. An example might be to reduce energy consumption by changing to LED lights or upgrading HVAC systems to run on less costly alternative energy sources. Another cost reduction strategy is to reduce water use and waste from operations or from products and services.
For example, 3M has saved about $2.2 billion since 1975, when it introduced its “pollution prevention pay” (3P) program. The 3P program allowed 3M to increase the sustainability of its industrial manufacturing process. For 3M to achieve cost-savings, it had to change product formulas, reengineer equipment, and change other value chain systems. Though cost reduction is a method of ESG optimization, its long-term effectiveness is limited by:
Capacity: There is a limit to how much one can reduce costs.
Failure to address core problems: Reduction doesn’t tackle raw material issues or process failures.
Lost opportunities: Reducing costs is not as impactful as innovation.
Revenue generation strategy
A revenue generation strategy can be viewed as an intentional process by which an organization incorporates ESG practices throughout its business models, operations, and external stakeholders to create sustainable and monetary value. Revenue generation takes time but, if executed correctly, it can sustain returns even in bearish markets. Why?
Customers demand transparency, ethical products, and community support.
A strong relationship with suppliers and community produces continual feedback and results in better access to resources.
Increased credibility and market trust attract and retain talent.
Investment in assets with long-term returns increases capital over time.
When customers, suppliers, communities, talent, and assets are developed and taken care of systematically, the organization will tend to generate more revenue. This holistic approach considers the full “life cycle” of a specific product, service, or process, identifies all impacted variables and stakeholders, and considers all these factors when devising solutions.
Studies indicate a positive correlation between these holistic concepts and value creation. For example, the London Business School’s Alex Edmans found that the companies on Fortune’s “100 Best Companies to Work For” list generated 2.3 percent to 3.8 percent higher stock returns per year than their peers over more than 25 years. These statistics validate that there is more to ESG sustainability practices than cutting costs. A revenue generation strategy is a long-term strategy, instilling foundational resilience to flourish in trying times.
Of course, cost reduction and revenue generation are not mutually exclusive. Ideally, they can work hand-in-hand to achieve an ESG sustainability profile and to develop a strategy that serves the company and its stakeholders in both the short- and long-term.
Are you looking to improve your company’s ESG profile and ratings? Reach out to The Global Imprint and tell us what’s on your mind. Our experts will work with you to increase your sustainability scores and develop a strategy for achieving the best of both worlds, for your business and Planet Earth.