Sustainability in business – Beyond box-ticking
Sustainability in business has become a hotter topic of consideration and evaluation for boards, investors and customers than ever before. In these times, it is more and more common for businesses to talk about or be asked about (and are now being asked to report in in greater detail) their position regarding Environmental, Social and Governance matters (generally referred to as “ESG”) which are broadly the three areas that are being scrutinised when sustainability is being considered.
Companies and business leaders have come to see good governance, an effective purpose and adopting values aligned with their staff and their customers as being “not about box-ticking.” (James Wates, CBE) but as a business differentiator. Environmental risks are being factored in more to investment decisions with customers seeing more regularly that an environmental event can lead to substantial losses and companies are finding that a social overlay (such as policies on climate change, how employees are treated and how suppliers are treated) can lead to them having a competitive advantage as consumers seek out companies that are tackling these challenges. More recently, BlackRock have identified these traits as being an ever increasing valuable business trait noting: “this period of market turbulence and economic uncertainty has further reinforced our conviction that ESG characteristics indicate resilience during market downturns”.
Against this backdrop, there is also an increasing interest in B Corporations, with there now some 3,243 companies in 71 countries and across 150 industries becoming B Corporations and legally binding themselves to consider their workers, customers, suppliers, community and the environment in all of their business decisions, and this includes large companies that are listing as well (such as the recent Lemonade Insurance Company IPO). Customers and investors are seemingly recognising the value of the B Corp certification when looking to grow their businesses, with the certification being attractive to recruiting and retaining talent and for buyers and investors in recognising that a B Corp can appeal to a wider and different customer base perhaps from its own traditional business.
With a report published this month also showing that listed companies that are at least 33% female return a profit margin 10 times greater than those without any women, this further highlights that governance and being aware of social issues such as diversity and inclusivity are not just the right things to be focussing on, there are positive business outcomes to be gained from truly embracing ESG.
But in attempting to also put some balance in to the debate, there are also other views that highlight that, in itself, ESG will not be the sole driver of success or value creation (see for example Professor Alex Edmans), and some research argues that the business world and the investment world and value creation is still far more involved than ESG factors alone.
While having a good solid understanding of your business and your industry and being able to effectively execute a well thought out strategy is still key to success of a business it seems that businesses are likely to miss opportunities within that strategy and in their growth ambitions if they do not embrace ESG as a core, embedded part of any strategy as it is likely to become a bigger factor in the decisions of customers, investors and buyers in the future and it is a brave business that ignores those three groups in its business plans.
Stuart is a Partner in our Corporate team.
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