By Chris Park and Dinah A. Koehler, Deloitte Consulting LLP | 21 June 2013
Historically many companies have treated ESG (environmental, social and governance) issues as important but tangential to the core business. Sometimes their motivation was a desire to be recognized as good corporate citizens. In other cases, ESG issues were viewed as a matter of compliance with regulation or stakeholder and public demands. As a result ESG issues were managed without a direct connection to the core business, bottom line and business strategy.
Today, however, companies are increasingly expected to address ESG issues head on. ESG is becoming a C-Suite issue and is expected to have an important impact on the bottom line. At the same time, many are recognizing both the tangible and intangible value of integrating these issues into core business activities. Commitment of human and financial capital to this area continues to grow, especially among companies that increasingly see impacts on their value chain.
In a recent Deloitte survey (“ESG survey”) of 250 business executives, three drivers of ESG imperatives were identified: a need to bolster the corporate reputation and brand, increased regulatory scrutiny, and higher expectations from consumers and the broader community. Most of the surveyed executives expect ESG issues to have a growing impact on their strategies, products and services, and operations over the next two years. Not surprisingly, large companies (with more than $10 billion in revenue) foresee the greatest impact. These companies tend to operate across industries and geographies where the social and environmental issues are most acutely visible. Another Deloitte survey found that two-thirds of global CFOs expect their role in ESG (environmental, social and governance) related strategies to increase over the next two years.
Most leaders would agree that the trend exists. Now the question becomes – how can companies reap benefits to the business and create shareholder value?
PINCH, PUSH, SHIFT
Aligning ESG issues and corporate citizenship with commerce can help companies create shareholder value in three increasingly measurable ways: pinch, push, and shift.
Pinch. Downside risks should be reduced or “pinched”, especially in a global marketplace that is volatile, resource-constrained, and socially engaged. One way to do this is by integrating ESG and financial reporting, which can improve understanding of the financial implications of ESG risks, and help drive targeted mitigation strategies. Improved transparency can also help build trust with customers, investors, and employees, creating a halo effect that makes it easier for a company to earn forgiveness when things go wrong, while getting more credit for things it is doing right.
Push. Companies can also leverage social and environmental issues to create new product and services that drive revenue and reduce operating costs. Deloitte’s research on innovation shows that leaders on ESG issues are more than 400 percent more likely to be considered innovation leaders. For example, Nike’s Considered Design initiative has enabled the company to recycle 82 million plastic bottles into high-performance sportswear, reduce waste by 19 percent in its footwear business, increase the use of environmentally preferred materials by 20 percent, and achieve a 95 percent reduction in volatile organic compounds. In addition, a Deloitte ESG survey shows that 32 percent of senior executives expect more than 5 percent of annual revenue growth to come from products and services that reduce environmental and social impacts in the next couple of years.
Shift. Weaving ESG factors into the fabric of a company can improve shareholder value over time by permanently shifting the expected share price to a higher level, creating a valuation premium. Part of this shift comes from pinch and push, which help strengthen a company’s brand, reduce risk, and fuel innovation. Another part comes from improved operating efficiency and reduced waste, which can significantly reduce costs and increase profitability. In addition, a strategic approach to ESG issues can boost a company’s value by helping to attract financial and human capital. Responsible enterprises enjoy a lower cost of equity capital than their less responsible counterparts. They also have an easier time attracting talent – especially younger workers, who tend to be particularly conscious of social and environmental issues. These effects can help create a lasting competitive advantage.
Figure 2. Goals of ESG strategy (LinkedIn poll results)
The increasing focus on ESG issues is a long-term trend, driven by rising public awareness and the need to adapt to macro global shifts, including income disparity, demands for higher quality of life and environmental degradation. Companies that are further along the journey toward integrating effective ESG measures into risk management approaches, business operations, and strategy will likely be in a stronger position to compete in the future. Responsible enterprises have the benefit of being able to take a strategic and measured approach when responding to stakeholder pressures and environmental crises.
On the other hand, companies that continue to treat ESG issues merely as compliance could be missing an opportunity to be rewarded for the good work they do, making it harder to attract the customers, talent, and capital that are crucial to value creation. Their strategy is shaped by their competitors who have already embarked on the journey to greater integration of ESG into the business.
Chris Park is a principal with Deloitte Consulting LLP and the leader of Deloitte’s Sustainability offering. Dinah A. Koehler, ScD is a senior research manager at Deloitte Research, a part of the Deloitte US firm. Chris and Dinah are co-authors of “The Responsible Enterprise” from Deloitte’s 2013 Business Trends which cover eight trends that have the potential to upend long-held assumptions, energize strategic planning efforts, and fundamentally shift the business environment for individual companies or industries.
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 250 US (nonsustainability) executives, ranging from vice president to board member, working in companies with over $500 million in global annual revenues, were surveyed from November 28 to December 5, 2012. Respondents represented 12 different industry sectors, with the most respondents from the financial services industry. In a separate LinkedIn survey conducted by Deloitte, over two-thirds of 188 respondents believed their competitors pursue an ESG strategy to bolster reputation and brand.
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