Here’s how you can create value with an active ESG policy

20 March 2023

What do you believe is the biggest challenge of our time? In our view, it is the sustainability issue of our society and our economy. There is a reason why concepts such as ESG policy and corporate social responsibility are the top agenda items for investors, businesses and governments. It’s no longer just about financial performance. And sustainability, CSR and ESG no longer stand in the way of that performance. In fact, they create value. Consideration for environment, society and good governance pays off!

It is a proven success

This is not a conclusion we have simply dreamed up. We rely on recent research by Moore DRV. The study shows that companies that are actively engaged in ESG have doubled their sales and tripled profits over the past three years. Moreover, customer loyalty grew for those businesses and raising external and equity capital became easier. That says enough, doesn’t it?

About sustainability and ESG

Let’s go back to the books for a moment. What do sustainability and ESG actually mean? To start with the former, we’ll look at the definition formulated by Statistics Netherlands (CBS): Sustainable development is a development that meets the livelihood needs of the present generation without compromising those of future generations. These include economic, social and environmental needs. Examples include a clean environment, biodiversity in nature, a highly educated and healthy population, well-functioning social networks and social trust.

ESG is short for Environmental, Social & Governance. It means that factors such as energy consumption, climate, resource availability, health, safety and good corporate governance are taken into account in all business decisions. In this context, environmental (our world) stands for climate change strategy, biodiversity, carbon and nitrogen emissions, waste streams, etc. Social (our society) refers to equal opportunities, inclusiveness, human rights, working conditions, health and safety, among others. Finally, governance (our business) stands for business ethics, compliance with laws and regulations, board independence and bonus payment culture. In other words, although focusing on ESG doesn’t necessarily make you sustainable, it does bring you closer to sustainability.

How does a good ESG policy create value?

Good ESG policies can result in economic value. But what is economic value? This is determined by the current cash value of future cash flows. When it grows, we speak of value creation. This growth is generally influenced by two elements: growth of the business and improvement in returns on invested capital. But what can a good ESG policy add to this? McKinsey has conducted extensive research into this and notes five developments:

1. Revenue growth by offering more sustainable products or being able to perform services thanks to the ESG policy. For example, it is an absolute mustfor an infrastructure company attain safety grade 3 or higher on the safety ladder to work for the major energy companies.
2. Energy- and water-saving production techniques give substantial cost savings.
3. A good ESG policy ensures fewer restrictions from increasingly stringent laws and regulations.
4. Strong ESG policies (mainly on the social pillar) make it easier for companies to attract and retain quality staff. Moreover, staff engagement, satisfaction and motivation result in increased productivity.
5. Sustainable investments pay off better and for a longer time.

It is not true that all developments contribute equally to all companies. It is a proven fact, though, that sustainability will affect every organisation at some point and to some degree – and they can therefore profit from ESG policies.

Reporting is (often) mandatory

That’s all good and well, but policies like this are by no means optional. In fact, it is mandatory for more and more companies to report on ESG policies. SMEs are off the hook, for now at least. Still, that shouldn’t be a reason not to start working on it. It will pay for itself in the long run, perhaps sooner than we can imagine now. And you also contribute to a better, cleaner and future-proof world.

Want to know more?

Are you curious about the value and impact that ESG can have for your business? Then reach out to one of the corporate finance advisers at Joanknecht Corporate Finance.