Why ESG Is So Important

Last updated on February 13th, 2024 at 12:59 pm

Do you wish to know why ESG is so important? Yes, ESG (Environmental, Social, Governance) performance is critical for companies to demonstrate corporate responsibility and operational sustainability.

I learned this powerfully while consulting a construction firm on their net zero transition. Despite having robust decarbonization targets, they faced community backlash over local pollution concerns.

By lacking priority around social dialogue and governance inclusion of marginalized voices, their environmental efforts risked losing legitimacy regardless of intent. It taught me ESG must evolve together or progress stalls.

This experience revealed how integrated and interdependent these sustainability dimensions have become for business success today. In this guide, I’ll break down exactly why and how leaders are realizing ESG’s full value.

See, **ESG sets clear standards and performance metrics around major issues like:

• Environmental footprint, emissions, resource use
• Workforce diversity, equity and inclusion
• Executive pay, transparency, accountability**

And it directly ties these to financial value creation, risk management, and competitive positioning.

So why does ESG matter so much? What’s driving businesses to finally get serious about it if they want to thrive in the 21st century?

The ESG Imperative – Why ESG Is So Important

It’s impossible these days to ignore just how much societal expectations and values have shifted when it comes to corporate purpose, sustainability, and responsibility.

Customers, employees, and investors – especially amongst millennials and Gen Z – are far more conscientious about who they buy from, work for, and put their money behind.

• 92% of consumers now expect companies to address social and environmental issues
• 87% would purchase a product because a company advocated for an issue they cared about
• 76% consider environmental impact when making purchasing decisions

It’s what people now expect from businesses they associate themselves with – to not just make profits, but have a positive impact on society and the planet. Brands that fail to meet the bar on ethics, sustainability, and purpose put their reputations at risk.

At the same time, ESG is being driven by policy changes and growing regulations tied to mandatory disclosure and meeting set targets.

For example, the EU has implemented comprehensive ESG reporting standards for investing and corporate sustainability. The US Securities and Exchange Commission is also proposing new rules to enhance climate-related disclosures from public companies.

Even more impactful are performance requirements related to:

• Carbon emissions
• Renewable energy
• Deforestation
• Water use
• Circular economy
• Living wage
• Workplace diversity

Businesses will need robust ESG strategies and strong sustainability credentials to comply and avoid penalties or loss of licenses.

And arguably most influential of all – ESG is now front and center for the investment community. The growth has been staggering:

• Global sustainable investing assets under management nearly doubled from $22.9 trillion in 2016 to over $35 trillion in 2020
• 1/3 of all assets under management in the US today are tied to sustainable investing strategies
• 89% of millennial investors are interested in sustainable investing

This surge of ESG investment mandates and capital flowing into sustainable assets has enormous influence. It gives companies serious incentives to improve their sustainability performance if they want access.

So between evolving societal values, stepped up policy regimes, and trillions of dollars in investment – it’s clear that ESG is only growing as an integral part of competitive business strategy for the 2020s and beyond.

The Strategic Business Case for Embedding ESG

With all this external pressure, some business leaders understandably feel overwhelmed. They see ESG as just more red tape, forced costs, and box checking for PR purposes.

But that mindset really misses the big picture and strategic opportunity here.

See, getting out ahead of rising ESG expectations and requirements isn’t just about playing defense and mitigating risks. It’s about positioning your company for the future business landscape while reaping tangible benefits today.

The leaders implementing ESG holistically across their organizations are finding it provides:

• Increased resilience against disruption
• Enhanced trust and relationships with stakeholders
• New avenues for innovation and revenue growth

Let’s break down each of these core business advantages of embedding ESG…

Getting Ahead of ESG Issues Drives Risk Management

Something we learned all too clearly from COVID – external shocks can devastate companies without warning. But organizations leading on ESG tend to navigate crises and volatility better.

Why?

Because addressing these environmental, social, and ethical issues proactively makes companies more agile, transparent, and cohesive in the face of disruption.

For example, companies benchmarking their carbon emissions and setting audacious reduction goals long before regulators stepped in were ahead of the curve when policy changes occurred.

They already had the internal practices and technologies to be resilient and adaptive. This advantage will only increase as more extreme weather unfolds globally with climate change in the years ahead.

Likewise, organizations putting in the work on diversity, equity, and inclusion (DEI) programs found themselves with stronger cultures and more engaged workforces during an era of social reckoning and heightened awareness of racial injustice issues.

Employees rallied behind companies with credible commitments to tackling societal problems – leading to greater productivity and capacity to handle challenge.

In essence, ESG helps future-proof companies by getting ahead of coming changes instead of reacting when it’s too late. It prepares them to better respond to and engage stakeholders during market shocks or controversies.

Differentiating Your Brand Through Shared Values and Purpose

Today’s savvy consumers have high expectations for the brands they support when it comes to sustainability practices and social impact.

Brands that fail to meet the bar put their reputations at risk. But those authentically walking the talk on environmental stewardship and ethics enjoy increasing trust and loyalty from customers.

Patagonia stands out as a pioneer here.

They built brand cachet and popularity through campaigning on environmental issues years before it was remotely trendy. They took bold stances like suing the Trump administration over policies that put national monuments at risk.

This cemented Patagonia as a mission-driven company willing to sacrifice short term gains for sustainability principles. It gave the brand permission to charge premium prices for apparel bought by loyalty customers validating their values.

Beyond customers, ESG helps forge differentiated and enduring bonds with a wider set of stakeholders like employees, business partners, regulators, and local communities.

It comes down to shared purpose over profit motives alone. And people inherently trust and want to affiliate with organizations advancing societal interests – not just chasing returns.

In an era of skepticism over big business, ESG performance and integrity provide competitive edge.

Sustainability Sparks Innovation and Market Opportunity

Finally, integrating ESG throughout operations isn’t just about mitigating risks or brand building.

It can unlock entirely new opportunities through sustainable technologies, processes, products and business models aligned with global mega-trends:

• Renewable energy
• Regenerative agriculture
• Plant-based alternatives
• Sharing economy platforms
• Circular supply chains

Look at electric vehicle upstart Rivian. They burst onto the scene by securing $11.9 billion in funding over three rounds from backers like Ford and Amazon.

Why? Because they brought product and design innovation to one of the hottest ESG-tied spaces – clean transportation. In the process, Rivian carved out a niche taking on titans like Tesla with a compelling sustainability vision underlying their business.

But you don’t need an entirely new company to tap these opportunities. Incumbents like IKEA and WalMart have invested billions recently retrofitting their supply chains for circularity, renewable energy, and elimination of net emissions.

They understand the revenue growth linked to offering customers sustainable products and meeting their evolving preferences. First movers here often gain efficient operations while winning share from laggard competitors.

So in sum – Between proactive risk management, differentiated branding, and new market opportunities related to evolving ESG trends – there is a compelling strategic rationale for companies to embed these practices within their core business.

It goes from being a “nice to have” for PURPOSE-driven companies to an indispensable priority for any forward-thinking organization.

And this leads to the next big question…

The Financial Performance Payoff of High ESG

At its foundation, the case for ESG must be rooted in value creation and financial returns above all else.

Nice stories about sustainability get CFOs and investors on board for only so long if the numbers don’t clearly back it it up.

Luckily an abundance of evidence now links high ESG performance to better financial metrics like returns, profit margins, earnings growth, and valuation multiples.

For example, a recent meta-study found:

• 63% of academic studies show a positive correlation between ESG and stock performance
• The largest, most rigorous studies demonstrate core ESG factors explain >30% of differences in valuation
• Companies with high ESG ratings consistently outperform the market by several percentage points

Likewise, 90% of studies analyzed by Oxford University researchers found that sound sustainability practices lowered firms’ cost of capital given perceived lower risks by investors.

And McKinsey research spotted a direct link between higher ESG performance and greater likelihood of high profitability, earnings growth, and future value creation.

Ultimately, this financial edge makes sense given everything we covered earlier around:

• Risk mitigation
• Innovation potential
• Stakeholder alignment

But it’s not just retrospective data. The future growth and direction of global capital means that access and costs will hinge on ESG metrics.

ESG Becomes Key for Securing Investment and Lowering Cost of Capital

With $30+ trillion in assets now benchmarking against sustainability:

• Stricter ESG mandates from asset managers will require minimum thresholds
• Companies with poor ESG will see shareholder divestment and loss of backers
• Top ESG performers will attract inflows of investments at lower cost

This is already playing out in spaces like green bonds where sustainability leaders can raise large amounts of low cost financing for growth.

But more broadly, ESG is being built into financial analysis for lending, lending rates tied to meeting targets, and preferential access to patient capital pools focused on long term sustainable development over quick returns.

Companies lagging in ESG will pay the price through higher equity costs, debt costs, insurance costs and depressed valuations. It directly hits the bottom line and core financial health.

In essence, ESG becomes the core lens through which businesses get evaluated by investors and markets. It will shape winners and losers for capital access the same way credit ratings do today.

And this future is already arriving faster than expected. Leading companies are moving decisively on ESG to lock in financial advantage before laggards wake up.

Additional Benefits: From Talent to Productivity

Driving revenue growth, accessing capital, minimizing costs and risk – the main financial arguments around ESG are clear.

But the benefits hardly stop there.

Getting ESG right has wide ranging bottom line implications through ancillary areas like:

Attracting and Retaining Top Talent

HR teams know firsthand how competitive the labour market is today. Millennials now make up the majority of the workforce, while Gen Z is hot on their heels with similar expectations.

These groups prioritize working for companies aligned with their values – where they feel proud contributing to a larger purpose beyond the business itself.

And they especially care about sustainability and social impact issues given the trends their generation grew up with around climate change and corporate ethics scandals.

This manifests in game changing ways:

• 75% of millennials say they’d take a pay cut to work for an environmentally responsible company
• 63% won’t work somewhere that doesn’t have strong CSR practices
• Turnover rates are twice as high when people don’t believe in the company’s purpose

So sincerely embracing ESG ultimately becomes a talent strategy that provides unfair competitive advantage. Those seen as leaders can consistently attract and retain the best people – fueling a self-reinforcing cycle with culture and innovation.

Talent wise, there is no bigger turnoff today than being labelled a greenwasher – making hollow ESG claims solely for PR purposes that fall apart under scrutiny.

Boosting Productivity via Greater Employee Engagement

Research behind the Employee Engagement concept shows perhaps the single strongest workplace predictor of productivity, performance, and staff retention is:

The level which people feel personally connected to their company’s purpose and mission.

Far more than perks or even pay – this sense of meaning fuels motivation and drive.

And credible ESG policies happen to be exactly the sort of clearly defined principles that spark such meaning and inspiration daily. Employees feel pride working for companies trying to make a positive dent in the world.

Studies examining hundreds of global companies found employee engagement levels were:

• 150% higher at firms with strong ESG programs vs weak
• 23% higher when workers believed leadership truly cared about purpose beyond profits

Likewise productivity jumped:

• 21% when employees felt encouraged to deliver on sustainability commitments
• 13% when staff believed in corporate values and felt psychologically safe

This engagement effect within ESG helps explain the performance differentials too. Workforce cohesion and sentiment has cascading consequences on innovation, efficiency, risk management and executing strategy.

Creating More Nimble and Lean Operations

Beyond talent and productivity advantages, ESG best practices directly confer operational excellence benefits spanning:

Energy Use

• Switching to solar, wind and renewable sources
• Adopting low emission heating/cooling systems
• Optimizing for efficiency with sensors and automation

Logistics

• Route optimization algorithms
• Electrified delivery fleets
• Packaging redesign

Procurement

• Localized sourcing
• Circular/share economy supply partnerships
• Digitization to cut waste

These translate into immediate cost savings from:

• Energy and fuel
• Reduced materials consumption
• Logistics and transportation

But also longer term benefits like supply chain resilience, traceability, and flex capacity buffering against disruption.

In essence it’s about business fundamentals – cutting fat, improving processes, embedding future proofing. Sustainability demands ingenuity and integration unmatched by siloed procedures or ad hoc initiatives.

And done right, it acts as a forcing function for operational excellence with elevated expectations demanded from executive leadership and staff alike.

Companies embracing this find themselves light years ahead on capabilities like digital transformation, advanced analytics and holistic efficiency needed to compete as markets evolve.

In sum, ESG’s benefits stretch across the full value chain – from managing uncertainties to unleashing talent to optimizing operations.

It permeates all aspects of competitive performance, making halfhearted efforts untenable.

Why ESG Creates Business Value

To pull this all together – it’s clear that beyond “doing good”, prioritizing ESG now interlinks with competitive necessity from every angle.

These sustainability and ethical imperatives centrally drive:

The Tangible Benefits of High ESG Performance

Dimension	Direct Business Impact
Risk Profile	Lower volatility; increased resilience
Financial Returns	Stronger likelihood of profitability & growth
Innovation	New products, services and partnerships
Efficiency	Energy, materials and carbon savings
Reputation	Trust, loyalty and license to operate

Leaders increasingly recognize ESG as inseparable from overall business performance – underpinning their very right to operate and win within society over the long run.

But perhaps most profoundly, realizing ESG’s potential shapes culture and talent in invaluable ways money can’t buy.

The Intangible Benefits of Walking the Talk on ESG

• Inspiring people around bold purpose and vision
• Building camaraderie and pride through shared sustainability mission
• Attracting those intrinsically motivated to make a world positive impact
• Earning trust through principled decisions benefitting society/community

This sparks an energy and dedication fueling outcomes no compliance department or consultants could conceive of.

It’s why we see breakout ESG leaders repeatedly outdo rivals on ambition, strategic agility and exponential value creation.

FAQs

Why Is Esg More Important Now?

ESG has gained prominence in recent years due to a few key trends coming together:

• Heightened climate change risks making environmental stewardship an imperative
• Younger investors and consumers prioritizing ethics and purpose
• Disruptive technologies enabling more sustainable solutions
• Regulatory focus requiring ESG disclosures and standards

This perfect storm means companies disregarding their societal impact face major pressures from customers, talent, regulators, and investors alike in today’s world. ESG helps address those rising expectations.

What Is The Main Purpose Of Esg?

The main goal of ESG is to provide a comprehensive framework for businesses to account for their environmental, social and governance performance. This covers measuring, disclosing and improving on issues like:

• Carbon emissions
• Renewable energy usage
• Waste and pollution
• Water conservation
• Diversity and inclusion
• Executive pay fairness
• Data privacy and security

The focus is on quantifying sustainability efforts alongside profits to evaluate modern corporate responsibility and ethics.

What Are The Benefits Of Esg?

Research shows companies performing well on material ESG factors tend to be better long term investments and face less volatility. Benefits include:

• Lower risks – Proactively addressing ESG issues reduces exposure to crises
• Increased profits – Through efficiency gains and meeting customer demand
• Better access to capital – Preferential financing terms for sustainable assets
• Stronger brands – Differentiated by social purpose and integrity
• Improved talent recruitment – Aligning with values of younger workers

ESG helps future-proof strategies while driving innovation and stakeholder trust.

Who Is Behind Esg?

While more organizations are implementing ESG across sectors, major backing has come from institutional investors. Groups like BlackRock, StateStreet, and Goldman Sachs have over $20 trillion combined supporting ESG initiatives given the clear long term value at stake.

Government policy has also accelerated ESG through disclosure requirements, carbon pricing and incentives for issues like renewable energy. And reporting frameworks continue evolving through groups like SASB, GRI, IIRC and more.

What Is Esg In Simple Words?

ESG refers to the environmental, social and governance standards used to measure a company’s societal impact through sustainable business practices and ethical integrity alongside financial metrics.

It provides a 360 degree view of modern corporate performance on material issues like carbon emissions, workplace diversity, executive compensation and more.

What Is Esg Strategy?

An ESG strategy outlines a company’s vision, policies and programs to quantify, report on and improve environmental sustainability, social responsibility and governance transparency.

It requires setting goals, tracking key performance indicators (KPIs) and engaging both internal and external stakeholders across three pillars:

E – Environmental e.g. energy, water use, waste

S – Social e.g. labor rights, diversity & inclusion

G – Governance e.g. executive pay, lobbying policies

Robust ESG strategies increasingly represent sound business strategy and sources of value creation.

What Is Another Name For Esg Sustainability?

ESG is sometimes referred to as corporate social responsibility (CSR), triple bottom line or corporate citizenship. But it provides more structure than those concepts through standardized reporting frameworks that quantify sustainability performance.

How Does Esg Make A Difference?

ESG makes business practices more ethical on issues from climate impact to labor rights. But the data-driven rigour of ESG also creates business value. Leadership requires holistic thinking linking sustainability and profits to drive innovation.

And companies taking ESG seriously often have better cultures and more committed employees rallying around purpose. So ESG can enhance everything from reputation to efficiency to adaptation when executed well.

Why Do Investors Prefer Esg?

Investors gravitate towards ESG to better evaluate risks, find leading companies, and allocate capital more sustainably. With younger generations transferring wealth, managers adopting ESG may better attract and retain millennial clientele over the long term too.

But self interest is also at play. Considering societal issues like climate change protects all investments against systemic risks. So ESG helps avert issues that could damage global markets – creating conditions for superior long run returns across portfolios.

Conclusion

We’ve covered how ESG standards create purpose-led, future-facing businesses that outperform. By proactively improving environment, social and governance metrics, companies manage risks, drive efficiency and attract top talent while supporting healthy societies and returns.

Leaders now recognize ESG’s crossover with competitive advantage in the 21st century. Use this guide to embed relevant priorities across operations and culture. Applied correctly, ESG unlocks durable growth benefiting all stakeholders.