How to... Use ESG as a competitive advantage

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“ESG isn’t just for tree huggers”, by Sook partner ESGmark®

Research for this article led us to these immortal words from a financial consulting firm in Madison, rural Wisconsin. It made the team at ESGmark® laugh but for most people, the first thing they’d say is “what is ESG??”

What is ESG?

ESG stands for “Environmental, Social and Governance” and is a set of standards used to look at an organisation’s engagement with both its environmental impact and its social outreach. Simply put it is the business’ way of interacting with the world in a more responsible way.

ESGmark® believe there is a moral imperative to conduct business in an ethical, positive way but it is very clear that ESG policies have become a critical competitive edge as well.

COVID has forced organisations everywhere to focus on fire fighting. But as we waited at home for lockdowns to lift, profound changes were taking place in the working world.The pandemic brought social policy into the heart of the corporate world as companies realised that supporting workers to work remotely and flexibly from home was the only way to retain them. Last year’s IPCC report and COP26 brought renewed urgency to the climate crisis and our collective actions to counter global warming. As we start to re-open and look at the world around us with fresh (if slightly frazzled) eyes, socio-environmental pressures are back at the forefront of our mind.

'ESG’ has become the business acronym of the year so what does it mean to have a worthwhile ESG policy?

At ESGmark® we think a well considered ESG policy comes from the CEO downwards and incorporates elements across governance, ethics, fiscal responsibility, environmental stewardship and transparency of a company. Founders and management teams must think about creating value for all stakeholders and not only solve specific problems in the next quarter.  

How is it business relevant for 2022?

At its most basic, stripped of any moral obligation, ESG policy becomes a form of operational risk mitigation.

ESG factors used to be seen as ‘nice to have’ and something that could be covered with an employee volunteer day. And until the last couple of years – despite the growing scientific alarm bells – environmental responsibility was seen as a very long term consideration with little impact on the bottom line.

Now however, engaging with community and ecological issues helps companies anticipate and avoid hazards, strengthen their brand and deliver profitability. The advantages of tackling ESG issues go well beyond creating good PR and placating uneasy compliance lawyers. A proactive approach to ESG demonstrates that a company’s management can look strategically at long term risks, opportunities and trends, and act accordingly. Quoting Larry Fink – the activist CEO of Blackrock- “there is no company whose business model won’t be profoundly affected by the transition to a net-zero economy”  

Legal Requirements  

The first and most pressing issue for companies not already engaged (or engaged enough) with the sustainability agenda is the fact that ESG-related disclosures are now a legal requirement.

The UK is mandating compulsory disclosures in line with the Task Force on Climate-Related Financial Disclosures whilst the government’s Green Claims Code will render ‘greenwashed’ brands and products both a reputational and financial risk. (Similar initiatives are underway across Europe and the US.)

Companies that can demonstrate a strong, pre-existing ESG position will be at a competitive advantage from the get go. They will avoid the fines and reputational risks associated with weak or unsubstantiated reporting, insulate themselves from bad publicity and avoid costs related to ESG court cases (which could include anything from data breaches to discrimination, pollution to modern slavery).  

Immediate profitability  

Consumers increasingly want to make sustainable choices, and will purchase goods and services from companies they believe are environmentally and socially responsible. They are also prepared to pay a premium. According to the 2021 COOP/Ethical Consumer Magazine Ethical Consumerism Report, conscious and value driven consumerism in the UK alone has grown from c. £11bn in 1999 to almost £61bn in 2020.

Unrest around Black Lives Matter, a heightened awareness of trans rights, coverage of the unfair burden the pandemic placed on women in terms of childcare and education, and household chores, means that consumer are more engaged than ever with an individual company’s treatment of its workers and, by extension, its broader social engagement.

Similarly, extreme weather such as floods, heatwaves and storms is prompting evermore would-be buyers to put their money into goods they think make a positive difference to the climate crisis.

Supply chain resiliency  

The supply chain woes we have seen over the past few month serve as a reminder that we are all completely dependent on our supply chain systems. However short that chain might be, we all need someone to supply us with something. As a competitive differentiator there are few changes you can make that are more impactful than increasing visibility in your supply chain.

Transparency and traceability help you identify both risks and opportunities. A broad supply chain not only makes for more diverse suppliers - a big ESG tick - but spreads risk and minimises the threat of disruptions; sourcing options and production locations reduce the pressure on potential single suppliers. Cordial management means stronger relationships with suppliers with all the benefits that come with that - more reliable service, increased efficiency and better credit terms.

Access to talent 

Deloitte’s annual survey of Millennials and Gen Z for 2021 found that fewer than half of respondents saw business as a “force for good” but that they expect the corporate world to step up. They are and will be the driving force within the working world in the coming decade, so forward-thinking business owners will be taking steps now to improve working conditions, enhance the diversity of their teams, give back to their communities and take a stand on environmental policies. Engaged Millennials/Gen Z’ers want to work for businesses who put purpose alongside profit and commit to organisations whose values are aligned to theirs. A loyal, motivated workforce creates long term value through increased productivity, lower voluntary turnover and improved labour costs. 

Access to investment and capital 

Company policy will also come to bear on investment opportunities as baby-boomer to millennial wealth transfer takes place in the coming couple of decades. Cash rich millennials will look to invest their wealth in organisations whose policies they agree with and value; they will think in terms of long term value rather than short term returns.

A striking stat from the US based Forum for Sustainable and Responsible Investing shows total investment using sustainable, responsible and impact strategies reached $8.72 trillion in the US alone; an increase of 33% since 2014. For companies looking for funding and outside investment, professional wealth managers are incorporating evermore ESG-related parameters into their screening processes. Remember that investors make fact based decisions –green sounding statements are not enough - the sooner you start working on an active ESG agenda, the sooner you will start accumulating the data needed to give credence to your agenda.  

Remember your market 

“ESG” seems to trip off the tongue in a single breath but it is three very different, if interwoven, areas. Dependent on your business activity, the “environmental”, “social” and “governance” elements will form differing ratios and requirements for everyone, as will the potential impacts on profit margin. An artisanal fragrance producer will have a very different ESG profile to a digital marketing start up, just as large scale electronics manufacturers in the American mid-west will differ from a financial services provider in Zurich.

Make sure your organisation has the competitive advantage

At the heart of ESG criteria is the simple idea that companies are more likely to be successful if they create value for all their stakeholders – employees, customers, suppliers and society in general, including the environment – and not just for the company.  Even if this seems a little fluffy, failing to see the value of your company as a responsible member of society risks your business proposition becoming increasingly marginalised by companies that do.  If the cost implications are uncomfortable, the question you have to ask yourself is - what would be the cost if you choose to do nothing at all?

Want to find out more?

Visit ESGmark® by clicking here, and click below to read their handy guides on how to reduce your company's carbon footprint. Thank you to Julia Fawsley Grant.

Carbon Offsetting Part 1 - Introduction

Carbon Offsetting Part 2 - Cutting Through the Jargon

Carbon Offsetting Part 3 - Choosing your ProjectFull

Carbon Offsetting Guide

ESGmark® has also put together some pointers on how to reduce your carbon footprint whilst WFH. 

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