From talk to action: finding greater business value in your ESG strategy
The highly watched UN climate summit, COP26, has incited a surge of pressure on corporations to step up on climate commitments. Notably, pledges to the United Nation’s Race to Zero campaign have quadrupled since last November with 60 of UK’s FTSE 100 agreeing to commit to decarbonising their systems of operation to meet the 1.5C target. On paper, corporate commitments to scale up on Environmental, Social Governance (ESG) investments all look great. Realistically however, embracing the net zero imperative will only be made good if businesses benefit from their investments. This begs the question; how can sustainable initiatives effectively meet corporate fiduciary duties to uphold net zero promises?
Until now, some corporations have been hesitant to place sustainability at the core of their business agenda due to a falsified belief that the costs outweigh the benefits. However, research suggests differently. An Arabesque and University of Oxford study found that of 200 research studies done, 90% reported better corporate financial performance – notably operational and stock price performance, with the incorporation of ESG practices. A 2015 meta-analysis conducted involving 2000 studies also found positive correlations between ESG performance and financial returns. The fact is, it’s not that investing in ESG practices doesn’t bring profitable returns, it’s that the financial upside of sustainable practices isn’t adequately communicated. Dismissing this relationship doesn’t just uphold mistaken beliefs, but additionally limits a company’s ability to optimise on their ESG strategy to meet their bottom line.
So, the question is, how can companies realise the financial impacts of their sustainable strategies to create greater business value? There is a business case for ESG investment, whereby its financial contribution lies in a company’s ability to undertake, regularly monitor, and improve its sustainable strategies. Here are some steps your corporation could consider taking to do so:
1 Adopt the relevant model for measuring the financial impact of your ESG strategy
Setting up a high-quality sustainability strategy requires the appropriate framework for measuring financial performance. Several comprehensive frameworks specific to environmental management have been developed: ISO 14000, BREEAM, the GHG Protocol, and the UN Global Compact. These accounting strategies track sustainability efforts using financial rather than conventional non-financial metrics, providing corporations with improved insight into the business value of sustainability initiatives. Undoubtedly, corporate executives require the relevant data to feel confident when making investments in ESG initiatives. Having a data-driven performance measuring model could provide the reassurance you need to make this paradigm shift to more sustainable practices.
2 Establish concrete metrics
Establishing an effective benchmark makes it easier to reach sustainable initiative targets, as it allows for goal-oriented habits to be set. In this instance, I refer to James Clear’s Atomic Habits. The author posits that setting certain goals can bring about behavioural change that will more likely lead to success. Why? Because it breaks down goals and re-orients decision-making to practices more likely to meet set targets. While this approach is typically applied on a personal level, it’s useful in the context of ESG performance, too. For example, if the goal is to preserve natural capital assets (such as groundwater, biodiversity etc.), focus on the system of reducing waste, productively utilising natural resources, and so on. If businesses are committed to hitting the 1.5C target within the next three decades, this requires committing to smaller actions to which your business can be held accountable in the short term. And when done effectively, this process of optimisation could also be a cost reduction strategy, resulting in greater financial return.
3 Track your progress regularly to determine improvement techniques
Take your performance measuring model as a practical guide for strategic advancement. Committing to regular monitoring and improvement provides the benefit of identifying areas of improvement. This includes taking stock of cost or energy reduction strategies in areas that aren’t producing tangible results. For example, making material changes to the production chain can be an eco-efficient measure resulting in lower production costs and higher productivity. Recognise that small changes intrinsically motivate procedural changes. This process-oriented approach better positions corporations to develop adaptive strategies in response to volatile environmental, economic, social conditions. It’s this focus on capacity building that allows your business to effectively monetize on their ESG investments, ultimately driving growth and profitability.
There’s no denying that individuals make beneficial decisions when they’re incentivised, not when they’re penalised. When a conscious and consistent effort is made to assessing and improving the financial impacts of sustainable initiatives, the longer-term business value of environmentally-positive practices can be realised. This way, businesses will be able to utilise their green credentials not just as another marketing opportunity, but as a chance to make a genuine positive environmental impact.
Katherine Page
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