Why is ESG so important?

The term ESG, first coined in 2005 stands for Environment, Social and Governance. In the years since, the noise around ESG has grown louder and we are now seeing companies implementing these metrics into their strategy and incentive plans. We found in our recent GECN ESG research ‘2022 and Beyond: Global Trends in the use of ESG Plus Metrics in Executive Incentives’ that 9% of the maximum pay opportunity for executives relates to their performance in ESG. Yet many companies remain unconvinced by the use of ESG, thus raising the question: Why is ESG so important?

We know what ESG stands for, but to truly understand its significance in a corporate setting, we need to understand how and to what extent the company’s business affects each of the three elements in practice.

The Environmental aspect focuses on reducing greenhouse gases, emissions, waste product and other factors that affect climate change. The Social aspect focuses on building better relationships with employees, customers, consumers, communities and society at large to create a safer workplace, include greater diversity and inclusion practises and build and develop sustainable relationships essential for the long-term success of the business. Finally, the Governance aspect is all about the way the company is run, from board composition, compensation (both executive and non-executive) and the rights of shareholders. A robust corporate governance framework is an essential internal and external indicator that the company has the processes, checks and balances in place to ensure its “E” and “S” policies and practices are and remain fit-for-purpose.

With climate change becoming a greater cause for concern, the environmental aspect is becoming especially relevant. Companies are beginning to find that there are internal benefits to going green other than helping the environment. With an urgency on protecting the environment, governments are starting to offer subsidies for companies implementing sustainable methods of operation, helping to offset the costs of setting up new infrastructure. Furthermore, by using environmentally friendly practises, less energy is used, printed documents can be switched to digital, and less waste is produced, resulting in a reduction in operating costs and leading to an opportunity for greater profits.

Impact investing is the investment into companies, organisations and funds with the intention of generating a measurable environmental and social impact, alongside financial return. Impact investing is the fastest growing responsible investment market, valued at $715bn in 2020. With this style of investment on the rise, companies looking to achieve sustainable growth are likely to benefit from introducing ESG measures into their strategy and demonstrating their ESG credentials. It is likely that those who make this step early on are going to benefit the most from this type of inward investment.

Finally, ESG is becoming a driving force for consumer preference. According to a study by PwC, 80% of consumers are likely to buy from companies that stand up for ESG, and around 85% of employees responding to the survey would choose to work for companies that stand up for ESG over others that don’t. In some cases, consumers have also said they are willing to pay more for a product that was made with ESG measures in place, rather than cheaper products that weren’t. This shows that ESG companies are likely to generate higher revenue from higher sales numbers and higher prices than their competitors without these measures.

For more information, please contact George Edwards.

2022 GECN ESG research

Global Trends in the use of ESG Plus Metrics in Executive Incentives

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