The Strategic Advantage of ESG: How Sustainability Boosts Business
In a world where corporate sustainability has shifted from a nice-to-have to a must-have, the conversation among business leaders has pivoted sharply towards the importance of sustainability for business success.
The World Economic Forum has noted this trend, highlighting how integrating sustainability into corporate strategy is ethical and a good business decision. Furthermore, a study commissioned by Google found that corporate executives consider environmental social governance (ESG) programs a top priority. Execs stated they were willing to allocate 10% of their company's annual budget to ESG programs.
Now, the question is: Why are executives willing to spend so much money on programs that are often expensive, long-term, and lack immediate return on investment?
Simply put, placing ESG and sustainability as a core business strategy offers a wide range of benefits that pay significant dividends down the line. Sure, it comes at the cost of immediate returns, but mounting evidence shows it is a smart long-term decision.
Let's take a look at these benefits to understand why sustainability is a smart business choice.
Showing Social and Environmental Consciousness to Consumers
Consumers today aren't just passive buyers; they are active participants in the market with a strong voice and a clear demand for sustainable practices. A 2021 study found that 85% of consumers have become more environmentally conscious in recent years, with 60% stating that sustainability is an important consideration in their purchasing. Taking it one step further, over one-third of U.S. consumers are willing to pay more for sustainable products. In a nutshell, consumers are willing to change their consumption habits to reduce environmental impact.
This shift in consumer habits means companies must follow suit to keep their business. Failing to pursue ESG programs, and report on them, may lead to lower profits and a declining market share. On the flip side, capitalizing on sustainability can draw away market share from competitors.
Saving Money on Operations
Sustainability is not just about saving the planet; it's also about saving pennies, which can turn into significant profits. In simple terms, sustainability will make operations more efficient. Whether greening supplier shipping operations or reducing office energy use, operational costs decline.
This is particularly relevant for the development sector, where energy costs typically account for one-third of a commercial building's operational expenses. Cutting energy costs with sustainable building designs can significantly reduce these costs. For example, green buildings consume 25% to 35% less energy, and LEED-certified buildings have 20% lower maintenance costs than their conventional counterparts.
Attracting and Retaining Talent
Being a sustainable business is important for attracting top talent. A study by IBM found that 70% of workers prefer sustainable companies. This is even more relevant for younger generations, which typically place a higher value on sustainability.
This is highlighted in a study by Deloitte, which found that 44% of millennials and 49% of Gen Z workers have made career choices based on their personal ethics. With Gen Z and Millennials set to make up over 50% of the workforce by 2030, companies need to align with their values.
More investors are steering their funds towards companies with strong ESG programs, viewing sustainability as a marker of prudent management and long-term viability. On the institutional investor side, global ESG-focused investments are projected to increase 84% by 2026 to a total of $33.9 trillion. This will account for 21.5% of total assets under management by institutional investment companies. A similar trend is expected on the individual investor side, where 89% of investors say they consider ESG issues as part of their investment strategy.
One of the primary reasons positive ESG performance is desirable for investors is because it improves risk management, reduces instability, and improves long-term success. ESG practices minimize risk by limiting direct ESG-related threats and by facilitating the development of resilient systems.
Direct ESG-related risks can be accusations of greenwashing, which creates a negative public image, or spending excess capital on inefficient systems. Developing resilient systems includes forward planning for transparent reporting and developing supply chains that are resilient to unforeseen disruptions.
For example, studies show that companies with higher ESG ratings were less volatile during the COVID-19 pandemic and performed better than low-scoring ESG companies.
Getting Ahead of Regulatory Changes
In the same vein, governments around the world are tightening environmental regulations. Developing robust sustainability strategies in the near term is a way to stay ahead of these changes. By proactively engaging in ESG reporting and sustainability initiatives, companies can ensure they are not caught off-guard by new regulations, avoiding potential fines and disruptions to their operations.
Increasing the Value of Property and Attracting Tenants
For companies that own or develop property, green buildings are not just good for the environment but also a good financial choice. Studies show that sustainable buildings have higher property values and rental rates due to better living environments and because consumers value sustainability.
Additionally, on average, they have a 23% higher occupancy rate and better tenant retention rate than non-sustainable alternatives. This drives up rental income and offsets the initial investment needed to design a sustainable building. In the case of LEED, the average payback time is 5 years, after which point LEED-certified buildings become cheaper than conventional buildings.
Charting a Sustainable Path to Business Success with ESG
Leaders at small and large businesses are coming to the same conclusion — ESG and sustainability are essential. There is solid economic and social backing that it has significant value, and not including ESG in your business is now a major risk.