Resources | ESG and Diversity | December 22, 2022

Why ESG Matters for Business Performance

Higher revenue, reduced costs, greater resilience – ESG can deliver all those benefits and more.

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Higher revenue, reduced costs, greater resilience – ESG can deliver all those benefits and more.

When businesses invest in sustainability and diversity initiatives, it’s easy to think about those programs solely in moral terms: They’re important because it’s the right thing to do. But that overlooks all the other practical reasons why environmental, social and governance (ESG) issues matter.

Quite simply, ESG can exert a real and positive impact on your company’s financial performance, while also making it more resilient and more competitive in the marketplace. That can include benefits like an improved reputation with key audiences and a greater resistance to external shocks and threats. 

Let’s break down a few of the key reasons why ESG matters for business success.  

ESG can boost the bottom line

According to a new global survey from Infosys, about 90% of surveyed executives said that ESG programs led their companies to moderate (61%) or significant (29%) financial benefits. (The other 10% said their efforts didn’t make or lose money.) 

Meanwhile, a 2021 meta-study of more than 1,000 research papers, conducted by the NYU Stern Center for Sustainable Business and Rockefeller Asset Management, found that ESG initiatives were more likely to benefit companies financially. The full study revealed:

  • 58% of the studies showed a positive correlation between ESG and return on equity, return on assets or stock price.

  • 13% reported a neutral impact.

  • 21% produced mixed results — some positive, some negative.

  • 8% indicated a negative correlation between ESG and financial outcomes.

ESG attracts customers and workers

Your company’s actions on sustainability and diversity can help its reputation with both clients and employees.

According to C2FO’s 2022 Working Capital Survey, about 64% of global executives who were surveyed said they want the companies they do business with to take a stand on important issues. (In the US, the results were closer, but a majority of 53% still favored businesses that take a stand.) 

of surveyed employees said they preferred to work for companies that care about the same issues they do.

ESG can affect access to capital

An increasing number of investors and lenders are giving greater consideration to businesses’ ESG performance. They see sustainability, governance and diversity not as PR or brand issues, but as measures of a company’s risk and its long-term ability to thrive in a changing environment. ESG can and does affect credit ratings.

As a result, companies with poor track records could find themselves shut out of investment opportunities or having to pay more for capital. That’s what MSCI, a firm that advises the global investment community, found in a study that looked at capital costs compared to companies’ ESG ratings. The average cost for the highest-rated was 6.16% vs. 6.55% for the lowest-rated. (MSCI’s research also found that companies with high ESG ratings tended to have higher valuations and be more profitable.) 

There’s another way that ESG can improve access to capital: Some enterprises are trying to encourage their suppliers to adopt sustainability best practices by offering incentives, such as providing financing at preferred rates. This is something that C2FO’s early payment platform can easily support

ESG can mitigate or prevent business risk

Other businesses have found that investing in ESG-related improvements can help them better adapt to external events. For example, installing solar panels on company buildings or buying a fleet of electric delivery vehicles could help a business better adapt to surges in energy prices.

An ESG-forward approach can also help companies avoid expensive scandals and controversies. Businesses can lose sales, become the subject of strikes, incur fines or attract greater (and more constrictive) government regulation and oversight if they neglect ESG-related issues and find themselves at cross-purposes with their employees, their customers and society at large. 

There are real costs associated with ESG incidents. For example, a moderate to severe event — like news coverage that shows a brand engages in greenwashing or that a company discriminated against certain groups of employees — can generate stock market losses of -1.3% to -7.5% over the span of a year, Moody’s Analytics found. For the typical firm in Moody’s study, that equated to roughly $400 million in losses. 

ESG opens the door to greater innovation

Sometimes companies concentrate on ESG because the government, their business partners or someone else requires them to do so. Sometimes it’s a decision those companies make. 

But simply by making ESG a priority, companies are choosing to rethink their old, standard ways of doing things. It’s something that might not have happened if there were no pressure, internal or external, pushing them forward.

Pursuing ESG goals can help companies develop and adopt new innovations.

The bottom line on why ESG matters

When they focus on ESG goals, companies will make positive changes that can help them compete for customers and employees, prevent or mitigate expensive setbacks, access capital at better rates, invest in innovation and, yes, make more money.

It’s more than a feel-good exercise. When executed properly, ESG can create measurable, sustainable value for businesses that take it seriously.   

C2FO can help your enterprise incentivize suppliers to meet diversity and sustainability goals. Learn how the platform works. 

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