A significant shift in mindset is taking place among a growing number of business and investment leaders, who are starting to realize that ESG is an essential part of strategy and performance.
The CEO of BlackRock, the world’s largest institutional investor, has been writing to companies stating that ESG performance is essential to sustainable growth and returns. The largest company in the world, Walmart, has set the goal of using 100% renewable energy and now issues an ESG report to its investors communicating how the company’s performance underpins sustainable profit generation. The European Union has released an action plan for financing sustainable growth. Together, all of these examples (and many more trends we are witnessing) show a clear signal: ESG matters and is here to stay.
Today, there is a much deeper understanding of why ESG matters than a decade ago. A key study was published in 2015 by a group of academics including George Serafeim (co-founder of KKS Advisors and Professor at Harvard Business School), who demonstrated that companies with better sustainability performance generate higher financial returns. This evidence helped challenge the assumption that investors and companies would have to sacrifice returns in exchange for social and environmental impact.
As more and more academics, investors, companies, and governments continue to quantify ESG performance, the data continues to show overwhelmingly that ESG integration does not damage returns (at a minimum) while the potential upside is significant. There is also a growing consensus that the importance of ESG issues and the timeline in which risks may materialise are vastly underestimated – just ask Mark Carney, Governor of the Bank of England, for his thoughts on how climate risk threatens the health of the global financial system.
Despite the clear trend and positive signs of progress, many people fail to fully understand the fundamental reasons why ESG matters. Sadly, we still have companies that view sustainability as a useful marketing ploy. A large number of investors see ESG integration as something they have already been doing as part of their existing investment processes, when they are merely scratching the surface.
A limited, but growing, number of organizations are undergoing the required transformation to develop the expertise, tools, and metrics that will help them systematically address key risks and opportunities. The integration of ESG is central to this transformation.
At KKS, our mission is to reshape markets and we are seeing more clients buy into that vision as they learn about the importance of ESG, reinforced by the data. Across industries, there are extraordinary missed opportunities for aligning business and investment strategies focused on value creation with positive social and environmental impact.
It is encouraging to see more business leaders, especially CEOs and CIOs, stepping forward to embrace the opportunity. Those that have managed to translate commitments into action are reaping the rewards, including direct costs savings (e.g. from energy efficiency), better risk management, access to high growth markets, increased customer loyalty, stronger employee engagement, and lower cost of capital, ultimately driving better financial performance.
We have gone past the point where it is acceptable to wait on the sidelines. ESG matters.
End
Bronagh Ward
Senior Associate
KKS Advisors
(Subscribe to ESG Ireland Insights, including “The ESG Factor”, the new quarterly newsletter developed to provoke thought and motivate action on ESG. Email: Insights@ESG.ie)