The probability of businesses cutting costs has increased by 74% since the Covid-19 pandemic began.1 Simultaneously, companies are increasingly focused on employee wellbeing and sustainability within their organisations.
In previous years, when there have been calls to cut costs, businesses have tended to favour financial returns over prioritising their supply chains, consumers, employees as well as the environment in which they operate.
It’s since been proven, and is becoming increasingly understood, that profit and sustainability are no longer at odds, but can compliment one another – and with that in mind, businesses are now reconsidering their strategies for cost reduction.
Here are three ways which businesses can benefit from investing in and implementing Environmental Social Governance (ESG).
Supply chains today reach far and wide and are vulnerable to natural disasters and civil conflict. Climate change, water scarcity, and poor labour conditions in much of the world are just some of the factors which increase this risk. What’s more, supply chains can account for up to four times the greenhouse gas emissions of a company’s direct operations.2
Social and environmental risk within supply changes tends to manifest itself over the long term and can affect a business’ operations in many ways. McKinsey3 reports that the value at stake from sustainability concerns can be as a high as 70% of earnings before interest, taxes, depreciation, and amortization.
Coca-Cola is a prime example of a business that had to learn this the hard way, when, in 2004, it was forced to shut down a plant in India, due to water shortages. Water has been historically perceived as an inexhaustible raw material, and many businesses have treated it that way. Coca-Cola, the 24th biggest industrial consumer of water, has since invested 2 billion dollars to reduce water use and improve quality in the communities where it operates. By implementing risk management and ESG strategy earlier, Coca-Cola would likely have avoided the effects of this closure on its business operations.4
Additional value from incorporating ESG into supply chain operations derives from continuous conversations and learnings from key stakeholders. Through this dialogue with supply chain stakeholders, organisations are more likely to anticipate and react to any adversity which may emerge.5
Notable cost reductions can result from increasing operational efficiency through improved management of natural resources like water and energy, as well as minimizing waste.6 What’s more, one study claims that businesses see an average internal rate of return of between 27% and 80% on low carbon investments.7
A focus on ESG can also result in process and logistics savings. Walmart, for instance, sought to double its fleet efficiency through improved loading, training, routing, and investment in technology. Over a period of ten years, it had grown fuel efficiency by around 87% compared to the start of the project. The project avoided 15,000 metric tons of CO2 emissions and created cost saving of almost $11 million.8
Executives continue to champion this. In a survey from Deloitte Global and Forbes Insights, more than half of the 350 respondents indicated a positive impact of sustainability efforts on revenue growth and overall company profitability.9
It’s evident that various groups of stakeholders are becoming increasingly conscious of companies’ ESG performance – from investors, such as BlackRock, whose ESG portfolio grew by 96% in 2020, to customers and employees.
Previously, many customers had been hesitant to pay for sustainable and eco-friendly products, but this is becoming less apparent with the raft of competitively priced, high-quality products now available.
In the Deloitte study mentioned above, 48% of respondents indicated increased customer satisfaction from sustainability efforts. Products made by companies that were considered to be sustainable were also viewed by customers to be better quality, directly affecting purchase intent.9
With a raft of companies improving their ESG efforts, from multinationals to SMEs, more and more individuals look to their employer’s values to mirror their own. 38% of executives surveyed indicated that embracing strong ESG values enhanced their ability to attract and retain talent.9 To that point, it has been shown that Estée Lauder Companies’ commitment to diversity and inclusion in its business have allowed it to not only attract top talent but be recognised by Forbes as the #1 employer for women.
So, what are you waiting for? If you weren’t already aware of the impetus for ESG, there is now increasing evidence to prove its value.
“Not everything that is faced can be changed. But nothing can be changed until it is faced” James Baldwin, Author and Activist.
- We Mean Business Coalition