From improved ROI, tax benefits, access to capital, and stakeholder relationships, companies are now investing in ESG for financial benefit. Sraddha Sab, Themes Reporter at GlobalData comments.
Corporate investment in internal environmental, social and governance (ESG) action is increasingly considered a smart financial decision.
A poll of 354 cross-industry respondents as part of GlobalData’s Q2 2024 ESG Sentiment Survey found that improving financial performance is the primary reason businesses believe companies should introduce an ESG strategy.
Moreover, in Deloitte’s 2024 Sustainability Action Report, the top two outcomes that executives expected from enhanced ESG reporting were reduced risk (53%) and increased efficiencies and ROI (52%).
Bernadette Bulacan, vice president and lead global evangelist at contract intelligence company Icertis, tells IAB: “In 2024, investing in ESG is non-negotiable for compliance, risk management and competitive advantage. With regulations and governmental bodies becoming stricter, companies must ensure their ESG claims are accurate and substantiated. This investment is crucial for managing risks associated with reputational damage, legal penalties and supply chain disruptions.”
Vineta Bajaj, chief financial officer at the Rohlik Group, a European online grocery retailer, adds: “Investing in ESG initiatives is not just about doing the right thing – it also brings tangible financial benefits. I’ve seen how pivotal ESG can be for improving brand reputation, operational efficiency and profitability.”
How ESG boosts financial performance
A growing body of research now links corporate ESG action to improved financial returns.
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By GlobalDataA September 2024 study of nearly two decades of data from more than 9,200 firms in the Asia-Pacific region found that firms with better carbon performance have “significantly lower financial risk”.
“Companies that took active steps to manage and reduce their carbon emissions enjoyed less volatility in their stock prices, diminished firm-specific risks and weren’t as sensitive to market-wide economic shocks,” the authors said in a report summarising their findings.
The NYU Stern Center for Sustainable Business also analysed the relationship between ESG and financial performance in more than 1,000 research papers from 2015 to 2020 and found a positive relationship for 58% of corporate ESG studies that focused on operational metrics such as return on equity, return on assets and stock price.
This is also reflected in market data. A KPMG survey of more than 200 business leaders working on ESG found that 43% of companies with more than 10,000 employees reported financial returns including mergers and acquisitions efficacy, access to new capital, and tax benefits, among others. Similarly, according to the EY 2022 survey of 500 chief sustainability officers and equivalents representing companies worth more than $1bn, 70% of companies reported financial benefits from climate action that exceeded their expectations, with companies taking the most ambitious climate action 2.4 times more likely to see a significantly higher financial return.
ESG action can translate to financial benefits through effects such as bolstering operational efficiency, better risk management, more innovation and supply chain optimisation.
Bajaj explains: “The scope of ESG investment is diverse, encompassing everything from carbon-neutral delivery logistics and sustainable sourcing to promoting diverse leadership. These initiatives not only minimise waste, but also reduce operational costs, directly enhancing margins.”
ESG action also enhances firm reputation, increases stakeholder reciprocation and boosts trust. Bulacan says: “Leading in ESG practices enhances a company’s ability to attract and retain customers, investors, and partners who prioritise sustainability.”
In addition, Deloitte also found that there is an associated “ESG-driven value premium” for the market value of companies with positive ESG scores.
The boost in financial resilience is also a result of protecting against rising regulatory and legal risk.
“A lack of ESG investment bears financial risk for a company. Things like reputational damage, regulation penalties or sanctions, or the loss of investors can all have a negative financial impact on a company’s bottom line,” explains Bulacan. She points to the Financial Conduct Authority’s Sustainable Disclosure Requirements, under which failure to comply can lead to significant financial penalties.
A poll of 354 cross-industry respondents as part of GlobalData’s Q2 2024 ESG Sentim
