“ESG” refers to the environmental, social and governance factors that shape the sustainability and ethical impacts of a company’s conduct. If you’re already operating internationally—or plan to—a good ESG strategy can help improve the value of your products and services while decreasing the negative impacts of your company on people and the environment.
ESG strengthens your business, makes it more resilient and is the right thing to do. Implementing ESG into your strategy will make your company more competitive and provide greater opportunities in the long run.
In this blog, we’ll look at:
- ESG and company revenues
- The benefits of an ESG strategy
- Implementing an ESG strategy
- Where we’re going with ESG
ESG practices and knowledge have been around for some time. In fact, socially responsible investors routinely use ESG criteria to screen a company’s behaviour before investing in them. But as Export Development Canada’s (EDC) chief corporate sustainability officer, I’m now seeing ESG take centre stage in an unprecedented way. This is in part to escalating environmental and social challenges and the added stresses caused by COVID-19.
While businesses are increasingly aware of ESG principles, those who have been reluctant to adopt them will likely need to confront ESG as a requirement of doing business. The reality is that more and more investment funds use ESG factors to decide which companies to support—a trend that will likely continue for the foreseeable future.
So, what do investment fund managers know that so many companies don’t? It’s simple: Studies have clearly shown that a strong ESG strategy can actually increase a company’s profits by:
- opening up new opportunities;
- attracting new customers;
- reducing risk; and
- increasing access to capital.
These fund managers also know that the pressure on international businesses to adopt ESG practices to operate in environmentally and socially responsible ways, is only going to increase. Companies that recognize this will likely outperform their peers when attracting investment, talent and customers.
Many of us are already seeing this trend in international markets. In order to compete, companies need to demonstrate that they understand and have adopted ESG principles. According to a study by the Boston Consulting Group, more than 300 companies found a strong link between the companies’ commitment to ESG and their financial performance. Those with stronger ESG metrics noticeably outperformed their less-committed peers.
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Elements of ESG
Each company will have its own mix of ESG concerns. The following is a list of examples:
Environment: How a company helps sustain the health of the natural environment, specifically regarding:
- waste and pollution;
- resource depletion;
- greenhouse gas emissions and climate change; and
Social values: Whether a company treats people well by:
- improving employee relations, working conditions, and health and safety;
- supporting projects or institutions to help historically underserved groups ; and
- ensuring ethical business conduct abroad that considers the well-being of impacted communities.
Governance: Whether a company polices its own ethical behaviour effectively, especially in the areas of:
- tax strategy;
- executive pay;
- political donations and political lobbying;
- corruption and bribery; and
- board diversity.
Still not convinced an ESG strategy is right for your company? Here are some of the key benefits:
- Gaining access to capital: A few years ago, when EDC spoke with investors about what they were seeing in international markets, ESG issues were only mentioned in passing. But the last 18 months have been very different: At least half of the investors we talked to say their expectations of companies, in terms of delivering on ESG practices, are sharply higher. Businesses that embed ESG in their corporate culture and operations—whether it’s in risk management, business activities, or social and environmental considerations—are now more likely to attract capital investments (often, at a lower cost) than those that don’t. This, of course, increases the long-term value of the company and its products.
- Avoiding divestment: Some larger investors are now turning away from corporations that don’t use proper governance to address social and environmental needs. Avoidance from a major investor can do more than reduce your access to working capital: It can also send a message to the marketplace that your company is no longer a good investment because of the way you’re behaving. These issues are substantially more important than they were 10 years ago, and at EDC, we feel that a company that commits to ESG will better understand its own operations and impacts, and ultimately, achieve better financial and reputational results than a business that doesn’t.
- Managing risk: Using ESG principles effectively can help you manage risk. Suppose you obtain crucial raw materials (coffee beans, for example) for your key products from a region that’s affected by climate change. By employing ESG’s environmental criteria, you can better understand the developing climate risks for your business and diversify your inputs or even change your business model.
- Encouraging innovation and growth: When you understand your risks and what drives them, you can find ESG-based solutions. This can spark a great deal of innovation as you’re forced to explore new and better ways of doing business. Such innovation can also open up new avenues of growth.
- Attracting and keeping customers: Putting ESG principles into practice can help you gain new and maintain long-term customers. Studies show that consumers are looking for sustainable brands and prefer to buy from companies that have strong environmental and social records. Conversely, companies that are singled out for poor ESG practices can suffer reputational damage that drives their customers away.
- Recruiting and retaining staff: Younger people are especially aware of social and environmental issues. As a result, they tend to prefer ESG-conscious businesses when looking for employment. If you have strong ESG values and openly demonstrate them, you’ll tend to recruit better staff and retain them more effectively.
- Adapting better to regulatory environments: Regulatory environments are evolving rapidly, and each jurisdiction is developing its own set of rules. Having a clear ESG strategy can help you adapt better to the regulations that govern the overseas markets where you do business.
- Enhance business resilience: Businesses need to be able to anticipate and prepare for change, then adapt to circumstances in the manner that provides the greatest chance of thriving over the long term.
Exporters of any size can develop and carry out an effective ESG strategy. But the commitment has to start at the top and cascade through the company. Employees at any level can help shape the evolution of your ESG practices and, if they’re on board, this will be felt across the company and ultimately, by your stakeholders and customers.
But don’t attempt everything at once. Start by thinking about which ESG issues have the most impact on your operations and tackle them one at a time. As you do, be sure to monitor and communicate your progress, so that your stakeholders, employees and customers know what’s going on.
It’s vitally important that you achieve concrete, verifiable results and share them with your stakeholders. An ESG strategy may look excellent on paper, but have little effect in the real world. People will eventually see through the façade and your credibility will suffer. Transparency is key: Don’t just publish your commitment—publish your results.
ESG is a central pillar of EDC’s 10-year strategy. Does this mean we have everything figured out? No. But the idea isn’t to sit on the sidelines and hope that the next steps will become perfectly obvious. We’re committed and recognize this will be a journey. And that’s our overarching message: Get started now, and EDC is here to help.
ESG is moving fast, but we’re all in this together and learning along the way. It’s creating an environment of collaboration that I’ve never seen in my career. There’s enormous interest in what we can do, a willingness to share our knowledge, and a commitment to get everybody moving without leaving anyone behind.
If you want to learn more about why ESG standards are important and how they can help you reach your international business goals, check out our free EDC webinar, Better business practices: Making ESG work for you.