How Does ESG Create Value for Companies
7 / April / 2023
The purpose of this research was to further understand the different ways that Environmental, Social, and Governance (ESG) create value for companies. My research led me to understand more about the employee and consumer habits of companies that implement ESG practices. In the following paper, I explore studies that try to understand how ESG impacts where people work, how productive they are at work, and where consumers shop.
In the 1960s, investors began considering social responsibility in their investment decision-making process to exclude companies involved in controversial activities such as tobacco production or involvement in the South African apartheid regime (Briand, 2018, p. 3). This trend led to the development of socially responsible investing, an investment strategy that employs non-financial factors such as environmental, social, and governance (ESG) to evaluate a company’s behavior. To attract investments and have a positive impact on the environment and in communities, companies started implementing ESG practices. Business practices focused on corporate social responsibility (CSR) have a long history in both industry and academia. Perhaps, in my opinion, corporate social responsibility has been developed from various angles for decades, but it would be more accurate to say that it has been reorganized around three ESG areas since the 2000s. Today, consumers and employees are more socially conscious and concerned about the impact of their choices. To understand the effects of ESG on consumer loyalty and worker productivity, I started the process by searching for information that answered my question in scholarly articles and company surveys and selecting the most relevant.
According to Cone Communications' (2016) study on Millennial Employee Engagement, 64% of respondents affirmed that they would refuse a job offer from a company lacking corporate social responsibility (CSR) practices. The same study found that 83% of respondents “are more likely to be loyal when they feel they can make a positive impact on issues at work” (p. 5). The study helps reinforce the importance and significance of businesses adopting practices that align with current societal concerns because it highlights what impacts the job decision process. More specifically, with over half of respondents declaring that a company’s practices and policies directly impact their job decision, the study suggests that by adopting ESG practices, companies are increasingly attracting and retaining talented workers.
In addition, a study conducted by Delmas and Pekovic (2012), published in the Journal of Organizational Behavior, implied that “firms that have adopted environmental standards enjoy a one standard deviation higher labor productivity than firms that have not adopted such standards” ( p. 1). Delmas and Pekovic argue that the adoption of environmental standards increases employees’ social identification with the firm, and is associated with organizational changes, such as the implementation of an employee training program or higher employee engagement. An example of an ESG standard is ISO 14001, which provides guidelines for organizations to establish and maintain an Environmental Management System (EMS). Similarly, Barrymore and Sampson (2021) found that labor productivity is positively affected by strong ESG performance when institutional structures provide ESG information to shareholders. The idea that companies prioritizing ESG practices experience an increase in their employees’ efficiency supports the positive correlation between ESG and workers' productivity. Therefore, sustainable and socially responsible actions have a significant impact not only on the ability to attract and retain talented employees but also influences workers' productivity.
ESG practices have also been shown to impact consumer habits. In PwC’s (2021) Consumer Intelligence Series Survey on ESG among 5,000 consumers and 2,500 employees, 76% of consumers mentioned that they would “discontinue relations with companies that treat employees, communities, and the environment poorly” (p. 2). The survey found that most customers are more likely to buy a product from a company that has initiatives related to environmental, social, and governance issues. In other words, ESG practices are an important driver that can change consumer preferences and relationships with businesses. Therefore, in our society, the way that companies address significant topics such as climate change, diversity, or inclusion influences consumer preference and loyalty.
Moreover, the NYU Stern School of Business Center for Sustainable Business and IRI (2019) released a new U.S.-based study that found that sustainable-marketed products grew 5.6x faster than products not marketed as sustainable” (p. 3). The study indicates that products that promote sustainability are growing faster than the overall category growth in more than 90% of the categories examined. The idea that sustainable products attract more customers supports the increasing consumer demand for sustainability, an ESG foundation. In that way, products from companies that have sustainable and socially responsible practices are more likely to grow and generate profit. An illustrative example of the increasing demand for sustainability can be observed in the outdoor apparel market. Patagonia and The North Face sell similar and comparable items, but Patagonia has always been known for its commitment to environmental sustainability and social responsibility, while The North Face has historically not placed as much emphasis on these values. This factor can help to explain Patagonia’s significant growth over the last years and its leading position in the outdoor apparel market.
As ESG factors are increasingly becoming an essential part of investors' decision-making progress, it is important to understand how sustainable and socially responsible practices can create value for companies. The review of current reports on ESG practices suggests that companies that address social and environmental issues in their practices and policies while remaining transparent with shareholders, tend to observe an increase in workers’ productivity and growth in product sales.
The review of current reports on ESG practices suggests that companies that address social and environmental issues in their practices and policies while remaining transparent with shareholders, tend to observe an increase in workers’ productivity and growth in product sales.
The increase in product sales can be attributed to consumers’ preferences and loyalty. With employees recognizing that they can be more selective with job opportunities and consumers having more options, businesses need to find a way to create genuine company values that are congruent with societal concerns. By prioritizing ESG practices, companies can become more efficient and make the world a better place. The only limitations to my research were related to the content. ESG is a relatively new and under-explored topic, therefore further research into the relationship between ESG investing and higher returns, as well as the impact of ESG performance on a company’s stock price would be valuable for understanding the full potential of ESG.