Why is ESG Important? 5 Benefits of ESG

With so many priorities competing for limited attention and resources, organizations may question the value of investing in improving environmental, social, and governance (ESG) beyond what’s required by current regulations. However, strong ESG performance is associated with many important benefits and financial outcomes. If your organization is still on the fence, here are 5 benefits of ESG that will convince you to make it a priority this year.

Benefits of ESG

1. Streamlined regulatory compliance
2. Reduced operating costs
3. Better shareholder returns
4. Stronger customer loyalty
5. Higher employee engagement

1. Streamlined regulatory compliance

As we mentioned above, ESG is a way of going above and beyond what’s required by current regulations. Why is that significant? Because when companies focus on improving ESG performance, regulatory compliance will naturally fall into place.

Take carbon emissions, for example. Reducing emissions is a common ESG target. Many of the steps companies take to reduce emissions, such as switching to renewable energy sources, can also help them meet permit limits and regulatory requirements.

In addition, companies with demonstrable ESG targets may be perceived as more responsible by regulators. For this reason, regulators may be less likely to scrutinize your company and more lenient if a non-conformance is discovered. Public reporting of ESG performance makes these kinds of information readily available to state and federal authorities.

2. Reduced operating costs

Improving ESG performance can also help lower operating costs. In fact, McKinsey found that ESG strategies can affect operating profits by as much as 60%.

There are a number of ways ESG can help lower operating expenses. ESG often focuses on reducing energy consumption, which can help companies save money on utilities. In addition, ESG emphasizes strategies to reduce water and raw material usage. As these resources become more expensive, ESG can help companies save money by eliminating waste and improving resource efficiency.

3. Better shareholder returns

Strong environmental, social, and governance (ESG) performance also correlates with better investor returns. An analysis of over 2,000 studies by McKinsey found that ESG propositions had a positive impact on equity returns 63% of the time.

Meanwhile, paying attention to environmental, social, and governance issues only had a negative impact 8% of the time. Naturally, with results like these, more investors are looking to put their money in companies that have good ESG performance. This can be beneficial to companies that are seeking to raise capital.

4. Stronger customer loyalty

Customers, too, want to know that the businesses they’re supporting are good stewards of the environment. ESG performance is a major predictor of customer loyalty; one study found that 88% of consumers will be more loyal to a company that supports social or environmental issues.

But today’s consumers are savvier than ever before, and they can see through greenwashing. That’s true for both B2C and B2B customers. For this reason, organizations have begun shunning fluffy, feel-good sustainability narratives in favor of evidence-based ESG targets.

Related: Sustainability vs ESG: What’s the difference, and why does it matter?

5. Higher employee engagement

Efforts to improve ESG performance also contribute to employee engagement. A study by Marsh & McLennan found that organizations with the highest employee satisfaction had ESG scores 14% higher than the global average, likely due to their strong environmental performance. This suggests that a focused endeavor to improve ESG performance may make it easier for companies to attract and retain talent.

Final thoughts

Improving ESG performance offers many benefits, from reduced costs to better stock performance and increased customer and employee loyalty. However, anyone who has embarked on the sustainability journey will tell you it’s not without its challenges.

In particular, organizations often struggle to measure performance and report on the impact of their ESG efforts. Companies need a robust set of tools that will help them track, report, and manage resource usage, carbon emissions, safety performance, and other metrics in order to drive greater efficiency and better financial performance. To learn more, request a demo of Lisam’s ESG management software today.