The pressure from the public on organizations to carry more social responsibility is growing. Society, investors, and talent demand that organizations be more transparent and sustainable in their business practices. Governments have finalized disclosures and benchmarks that need to be adhered to. Organizations are embracing environmental, social, and governance (ESG) principles in response to these demands and disclosures. Greater emphasis on ESG has led to a surge in demand for performance monitoring and improved business outcomes.
ESG as a concept attracts a lot of debate. The ESG framework calls for organizations to balance their economic needs with societal needs at a time of growing concern over social injustice, climate disasters, and the take-make-dispose economy. From an initial measure of goodness, ESG has grown and evolved into a concept that requires advanced investment and reporting. Legislation in the United States and the European Union now requires organizations to report their impact on environmental, social, and governance issues. Environmental issues include issues such as the depletion of natural resources. Social issues contain labor conditions for example. Governance issues involve, among others, worker diversity and pay. The objective of ESG is to capture non-financial risks and opportunities connected to the everyday operations of organizations. People in opposition to ESG argue that the concept limits organizations from reaching their potential, referring to it as "woke capitalism". Those in favor, however, say that ESG is critical to the longevity of organizations and must be included in any business strategy. The ESG concept continues to mature, but there are now regulatory standards and investor expectations that organizations must meet.
High expectations around ESG are coupled with big money. Based on a forecast by PwC (2022), ESG-focused institutional investment is set to reach $33.9 trillion in 2026. In less than five years from now, 21.5% of the total assets under management (AuM) will be ESG assets. Or, as Forbes (2022) puts it, ESG assets will constitute $1 for every $5 invested. Money isn't just with the investors. In March, Reuters (2023) reported that organizations spend up to $500,000 per year on sustainability ratings to meet the demands of investors. Furthermore, 92% of organizations plan to increase spending on environmental and sustainability initiatives (Honeywell, 2022). Data from the International Data Corporation (IDC, 2022) estimates that spending on ESG business services will be at $158 billion in 2025. Investments going to ESG aren't just to do good or meet requirements. They are also expected to yield returns. A study by Moore Global (2022) looked at 1,000+ organizations in eight major economies and estimated the financial uplift from adopting ESG, if done for all 1,262 organizations at the same time, to be worth $4 trillion. Apart from adhering to regulations, leaders benefit from investing in ESG when trying to attract more capital or improve revenues.
Efforts to comply with and go beyond ESG regulations are good for organizations' bottom line. Research by Bain & Company Inc. (2023) suggests that there is a positive correlation between sustainability measures and financial performance. One measure that fits under the governance pillar of ESG is boardroom diversity. Organizations that guarantee executive team gender diversity report 2% higher annual revenues than their peers who don't (Bain & Company Inc., 2023). A social measure is healthy work conditions. Leaders in ESG have more satisfied employees and report three-year revenue growth up to 5% above organizations with less-satisfied employees (Bain & Company Inc., 2023). Another measure is sustainable procurement which touches on environmental, social, and governance issues in organizations' networks of partners. Organizations focusing on their partners' ethics have 3% higher profitability than those who don't (Bain & Company Inc., 2023). Moore Global's study (2022) shows that the profits of organizations keen to adopt ESG grew three times faster than less keen organizations. The study also showed that 83% of organizations who invested in ESG enhanced customer retention and 84% improved their ability to attract external investments. Acting socially responsible isn't just good for the planet and society but also for organizational performance.
A sustainable business image is good for organizations' talent practices. Research by Deloitte (2022), showed that 52% of executives believed talent attraction and retention is one of the most likely beneficial outcomes of better ESG reporting. A 2021 study by IBM confirms that 70% of employees and job seekers are attracted to environmentally sustainable employers. Throughout "The Great Resignation", employees have shown that their perspective on work has changed. Different from before, 53% of frontline employees now say they're more likely to prioritize their health and well-being over work (Microsoft, 2022). Being serious about ESG includes implementing measures that address this changing perspective. Bain & Company Inc. (2023) showed that addressing workplace issues such as safe work conditions, mental and physical health, professional development, fair pay, and support in childcare is effective in improving employees' job satisfaction. Higher job satisfaction results not just in higher productivity but also in enhanced capabilities to attract and retain talent. Talent is drawn to businesses that do good. People want to do business with brands that are engaging in ESG initiatives.
Since its inception, the ESG framework has created a lot of buzz. There are people who believe organizations are made accountable for too many issues that limit their potential. Others see ESG as critical to sustainable business success. As ESG continues to mature, the expectations of stakeholders towards organizations grow. Governments require advanced reporting and investors are more keen to allocate their money to ESG leaders. In response, organizations are investing in ESG initiatives. Organizations with strong ESG commitments benefit from attracting more capital, acquiring and retaining the best talent, and delivering improved business outcomes. Whether organizations like or dislike their increased social responsibility, they have an opportunity to gain a competitive advantage by embracing its principles.