There is a point to ESG investing

One of the popular questions I am currently receiving concerns the value of environmental and social governance (ESG) investing. As many business leaders point out, ESG requires an entirely different mindset and business operating model; therefore, the process can become very disruptive.

With an eye on providing a suitable return on investment to shareholders and investors, many corporates are asking what is the bottom line value gain when it comes to ESG. I recently read an article by Ernst&Young which discusses this in more detail.

Increased investor confidence

The article points out that developing robust ESG reporting and disclosure can build confidence with both new and prospective investors. ESG is fast becoming integral to investor decision-making, with non-financial factors now being considered important to an organisation’s value creation.

The 2021 EY Global Institutional Investor Survey found that 78% of investors said they conduct a structured and methodical evaluation of ESG disclosures — when just three years ago, only 32% used this rigorous approach. We expect this upward trajectory to continue as ESG becomes part of the normal course of business.

The article adds that this current investor sentiment towards ESG-aligned organisations can translate into:

• Increased share price. According to 89% of institutional investors across major markets, companies with strong ESG performance deserve a premium valuation to their share price. And 90% agree that companies that prioritise ESG initiatives represent better opportunities for long-term returns; and
• Access to a lower cost of capital. As capital markets look to reprofile investments away from fossil fuel-intensive portfolios, they are offering preferential cost of capital for sustainability-linked lending. A four-year study by MSCI Inc found that, on average, companies with high ESG scores experienced lower costs of capital compared to companies with poor ESG scores in both developed and emerging markets. This ‘Greenium’ (green premium) is expected to be a short-term premium while the market rebalances towards greener alternatives and therefore is likely to be most accessible to those who move fast in adapting towards a more ESG-aligned business model.

Financial savings through greater efficiency

The EY article points out that by spurring innovation across their organisation, businesses can implement more sustainable practices while also driving financial savings.

Initiatives that target waste reduction or improving energy efficiency, for example, can drive down costs, reduce carbon emissions, and enable a more future-proof economic model. Analysts have drawn parallels between the scale and scope of the sustainability opportunity to that of the industrial revolution.

Enhanced brand reputation

The article adds that, as consumers increasingly prioritise environmental and social impact, they will inevitably seek products and brands that align with their values.

According to EY’s research, 73% of global consumers believe brands have a responsibility to make a positive change in the world.

In addition, 80% of global consumers believe brands must be transparent about their environmental impacts in the production of their goods and services.

The article adds that 54% of global consumers have reduced, or stopped altogether, purchasing from organisations they believe acted inappropriately on environmental or social issues.

Companies that act quickly to become more sustainable, and do so with transparency and credibility, can build strong customer loyalty and attract new customers.

Increased operational resilience

The article points out that, with the commitments made during COP26 (in 2021), there is increased impetus to drive decarbonisation through market instruments such as taxes and grants and increased environmental and social regulation. Organisations will need to respond to the opportunities and challenges that these changes will likely bring.

The proactive monitoring and managing of climate- related risks and adopting ESG measures enhances risk management and corporate governance and builds organisational resilience against the risks of climate change. For example, introducing measures such as internal carbon pricing can drive innovation and build preparedness for carbon taxes.

Competitive advantage over those who don’t act quickly enough

The article adds that businesses, and in particular start-ups, are adapting fast — sparking significant innovation that may well out-pace traditional market participants.

However challenging it may be, it pays to be an early mover. By developing market share, fast-moving organisations can exploit the competitive advantage gained in rapidly growing new markets. Acting quickly provides the best chance of turning the risks of climate change into opportunities.

Attraction and retention of talent

People increasingly want to work for purpose-driven organisations, and businesses will have issues with recruitment and retention of the best talent if they don’t accurately and genuinely articulate their purpose, backed by credible action.

The EY article points out that higher costs of staff turnover will impact organisations’ bottom lines as well as the capability of organisations to deliver. For the finance function, playing a key role in supporting the sustainability transition will make a role in finance genuinely appealing to the top talent of the future.

A change management mega-trend

The journey of a thousand miles begins with the first step. ESG can be disruptive to many companies; however, the value that it can provide is worth the investment.

Modern consumers think differently. ESG is at the top of their minds, and they will be reluctant to do business with a company that does not have a similar or enhanced focus on the same issue. To them, it is not just about the bottom line; it is about legacy building and community enhancement that comes with the bottom line.

ESG investing will be a change management mega-trend that will ultimately determine the future sustainability of companies.

Moses Singo is a Partner at Genesis Corporate Solutions and is a Junior Business Rescue Practitioner.