Why is ESG Important? 5 Reasons You Should Care
As of 2020, over 80% of companies had an Environmental, Social and Governmental (ESG) offering. So if your company hasn’t started investing in yours, then you may be falling behind. But why is ESG important? We’ve looked at some of the reasons why you should be setting up an ESG programme in your organisation.
1. Improve Your Topline
A recent study by Deloitte showed that 59% of companies report positive top-line impact from ESG investment. Not only this, but over half of companies surveyed saw a positive impact on overall profitability from their sustainability improvements. In fact, a McKinsey report suggested that in certain sectors such as banking, automotive, aerospace and tech, up to 50-60% of an organisation’s EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) is at stake for those under-investing in ESG initiatives.
There are a lot of elements that go into this, and even more stats to back it up. For example diverse management teams deliver 19% higher revenues from innovation when compared to less diverse teams. This trickles down to the wider team too - organisations with an emphasis on diverse hiring, employment and inclusion achieved an average of 28% higher revenue and 30% higher profit margins according to an Accenture study. One thing is for certain - there are positive ROIs to be made from investing in ESG.
2. Increase Your Investor Pool
Did you know that almost half of people in the UK currently have an investment? Of these over half prioritise ethical investing according to a survey by Finder.com. In fact, over 77% of potential investors are likely to consider investing ethically. Outside of the UK this holds true too, a Gartner study out of the US showed that 85% of institutional investors consider ESG factors in their investment decisions.
But why do investors care about ESG? Studies have shown that investors see ESG performance as a strong indicator of ethical corporate behaviour, which they believe reduces risk. Similarly, many investors believe that ethical companies are less likely to make expensive missteps or engage in financial fraud. This along with the topline benefits mentioned above mean that even as a small, or growing, organisation you cannot afford to miss out on ESG.
3. Decrease Your Costs
In a world where costs are constantly increasing, saving on your operating costs can actually have a big impact for many organisations. Research has shown that a focus on an effective ESG programme can have a massive impact on raw-material costs and the true cost of water and carbon. A McKinsey report has shown that this can be as much as 60%.
Savings will depend highly on the sector, but there is a need to realise the huge opportunity here. Preventing pollution for example by moving delivery vehicles to electric or hybrid, saves on fuel consumption and helps companies save large amounts of money in costs. Although there are up-front costs to these initiatives, many organisations find that the ROI, both direct and indirect (such as in staffing costs) can be substantive.
4. Get Ahead of Mandatory Reporting
In the UK many organisations are already required to report on their ESG initiatives. Since the 2022 financial year this includes more than 1,300 of the UK’s largest companies and financial institutions, such as banks and insurers. Many more are required to file based on the 2022 ruling by the US SEC about reporting of emissions. And still others will need to comply with EU rulings. However, even if these do not apply, it looks like ESG reporting will be signed into UK law by 2025.
By investing in ESG reporting early, you will not only achieve all the benefits laid out in the rest of this article, but you’ll also be able to save yourself a headache further down the road when reporting becomes mandatory. In areas where reporting isn’t already mandatory you’ll also be ahead of the competition! And you may well open up further markets.
5. Attract And Retain Your People
At THI we always say that your biggest asset is your team. All current research shows that companies that invest in ESG principles and messaging are able to recruit talent, retain their employees and increase employee productivity. For example, a LinkedIn and YouGov study showed that 71% of employees aged 34 and younger said they wanted to work at organisations that matched their personal values.
When we think specifically about your team, it’s important to remember that external reports are all well and good, but actually internal messaging is more important. This is why it’s so important to understand how your team thinks and feels about your initiatives. Impacts on hiring practices and retention will only be high if your team is bought in.
At THI we want to help you unlock as much value from your ESG initiatives as possible. Rather than offering ESG framework reporting, we help you measure the impact of your programme on your team with our specially tailored ESG survey. This will help you understand the true ROI of your investment. Why not speak to one of our experts for a demo of how we can help you further?
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