Finance Monthly - January 2023

Bus i ne s s & Economy Finance Monthly. 20 The business case for ESG It’s crucial that companies recognise the direct value of focusing on ESG in their markets. In order to tackle material environmental and social issues, companies need to scale up their investments supporting these areas. This requires a clear understanding of not only the environmental and social benefits but also the associated financial benefits. For instance, the NYU Stern Center for Sustainable Business examined the relationship between ESG and financial performance in more than 1,000 research papers from 2015 to 2020. They found that companies were 76% more likely to experience a positive or neutral correlation between a long-term focus on ESG and improved financial performance. ESG helps illustrate where companies’ expenses are going and where they can improve their resource efficiency. In relation to identifying operational inefficiencies, companies can use ESG-related data to see where they may be spending more money than necessary to clean up their pollution and waste. They can then look into more cost-saving waste reduction strategies. Additionally, many businesses may have untapped financial benefits of ESG strategies that they’re currently not tracking such as avoided cost, where ESGrelated data can help identify instances where less money is needed to be spent. Access to consumers can also be dependent on how companies are demonstrating their ESG efforts. In fact, a 2021 PwC ESG consumer intelligence study revealed that globally 57% of consumers say companies should be doing more to advance environmental issues (e.g., climate change and water stress), 48% want companies to show more progress on social issues (e.g., D&I and data security and privacy) and 54% expect more from companies on governance issues (e.g., complying with laws and regulation and addressing widening pay gap). As a result, ESG reports that successfully meet customer standards can improve the chances of both retaining existing customers and expanding customer base. Employees are also increasingly concerned about their employers’ ESG efforts. For example, a 2020 Reuters survey of workplace culture found that of 2,000 UK office workers, 72% of multigenerational respondents expressed they were concerned about environmental ethics, while 83% of workers said their workplaces were not doing enough to address climate change. With there being significant costs associated with recruiting and retaining talent, it’s important that as with consumers, companies put the effort in meeting employee standards. Focus on material ESG issues Companies may be tempted to cover the universe of ESG issues, but this is not the best approach. Instead, they should understand which ESG issues are likely to have a substantial impact on enterprise value and finances of the company as well as the demand for its presence from stakeholders (i.e., material ESG issues). ESG issues, such as business ethics, greenhouse gas emissions and community relations can be dependent on a company’s sector, size, geographic location, among other factors and so it is important that executives understand which areas make the most sense to put their focus and resources into. For example, a company within the oil and gas industry will be focused on methane emissions while a company within the technology industry will not. 57% of consumers say companies should be doing more to advance environmental issues (e.g., climate change and water stress). 48% want companies to show more progress on social issues (e.g., D&I and data security and privacy). 72% of multigenerational respondents expressed they were concerned about environmental ethics.

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