Environment, Social, and Governance (ESG) – Position Paper

Environmental, Social, and Governance

Introduction

In recent years, investment and business models influenced by the principles of Environmental, Social, and Governance (ESG) have gained traction as business owners, executive leadership, and investors increasingly recognize the importance of incorporating non-financial factors into their investment decisions.  ESG is a framework that businesses use to measure and improve their impact on the world beyond financial performance.  Environmental factors consider a company’s impact on nature and climate.  Social factors examine how a company manages relationships with employees, suppliers, customers, and communities.  Governance not only refers to a company’s leadership and internal controls, but also to the concerns and priorities of all stakeholders such as investors, vendors/suppliers, customers, employees, and local communities.

Position

Any successful business strategy is built upon a philosophy that is shared by its founders and executive leadership.  We at Coazt believe that integrating ESG principles into any business model, especially those that serve and are served by communities, will lead to increased trust with stakeholders and therefore greater and faster financial returns.  These benefits will be amplified as the network effects of the growing organization create a positive feedback loop that transcends its business model.

Benefits

Risk Management and Long-Term Value Creation

Companies that prioritize ESG factors tend to be better equipped to manage risks and seize opportunities in an ever-changing global landscape.  By integrating ESG criteria into the core of all resource allocation, companies can identify tactics with sustainable business elements that are likely to incentivize customers, vendors, and suppliers and will lead to decreased costs and increased loyalty over the long term.

  • According to a study by Harvard Business Review, companies with strong ESG performance demonstrated better financial performance, with 18% higher return on investment (ROI) compared to those with poor ESG performance.[1]
  • A Morgan Stanley report found that sustainable investing strategies led to equal or better financial performance compared to traditional strategies in 85% of reviewed studies.[2]

Alignment with Stakeholder Values

By aligning with ESG guidelines in the earliest stages, companies can more easily adopt tactics and strategies that don’t conflict with the values and beliefs of their founders, their communities, and their customers.  Whether it's supporting environmental conservation, promoting social justice, or advocating for good corporate governance, ESG principles empower individuals and companies to make a positive impact through their investment and purchasing choices.  This in turn creates greater asset engagement, brand loyalty, and willingness to refer others to the product and services.

  • ESG initiatives can bolster brand reputation and customer loyalty. A Nielsen study revealed that 66% of consumers are willing to pay more for products and services from companies committed to positive social and environmental impact.[3]
  • Positive ESG practices can help mitigate reputational risks associated with environmental controversies, labor disputes, or unethical behavior, thereby safeguarding brand value.

Enhanced Corporate Accountability

ESG criteria encourage companies to adopt transparent and responsible business practices.  By holding companies accountable for their environmental and social impacts, ESG principles incentivize them to operate ethically and sustainably, ultimately fostering greater trust and credibility with stakeholders.

  • ESG-oriented companies are often more attractive to top talent. A Deloitte survey found that 74% of millennials believe that businesses have a responsibility to address social and environmental issues, influencing their job decisions.[4]
  • Companies that prioritize ESG considerations in their operations are better positioned to attract and retain employees who are motivated by a sense of purpose and alignment with corporate values.

Resilience to Market Shocks

Companies that prioritize ESG factors are often more resilient to market shocks and regulatory changes. By addressing environmental and social risks, companies can mitigate potential disruptions to their operations and safeguard their long-term competitiveness.

  • The median return for larger ESG funds was 4% in 2023, outpacing the S&P 500.[5] Companies with strong ESG practices tend to exhibit lower risk profiles and reduced volatility. A study by MSCI found that high ESG-rated companies experienced lower systematic risk compared to low ESG-rated companies.[6]
  • Research by Harvard Business School indicated that companies with better ESG ratings were less likely to experience negative stock price reactions during times of market turbulence.[7]

Access to Growing Market Opportunities

The demand for sustainable products and services is on the rise, driven by changing consumer preferences and regulatory pressures. ESG investing provides investors with access to companies at the forefront of innovation in areas such as renewable energy, clean technology, and social impact initiatives, thereby tapping into lucrative market opportunities.

  • Investors are increasingly considering ESG factors when making investment decisions. A report by the Global Sustainable Investment Alliance highlighted that sustainable investing assets grew by 34% from 2016 to 2018, reaching $30.7 trillion globally.[8]
  • The Corporate Sustainability Due Diligence Directive was passed by European Parliament in April 2024.  The law requires companies, along with their suppliers and producers, to prevent, end or mitigate their adverse impact on human rights and the environment.[9]

Conclusion

ESG investing offers numerous benefits, ranging from risk management and long-term value creation to promoting corporate accountability and access to growing market opportunities.  By integrating ESG criteria into a business model and marketing strategies, companies can achieve financial returns and contribute to a more sustainable and equitable future for their vendors, suppliers, and partners.  Embracing ESG is not only a prudent business development decision, but also a powerful tool for driving positive change in the world.

Sources

1. Kramer, M. R., & Pfitzer, M. W. (2022). The Essential Link Between ESG Targets & Financial Performance. Harvard Business Review, September–October 2022. Retrieved from https://hbr.org/2022/09/the-essential-link-between-esg-targets-financial-performance

2. Burkhard, M. (2015, March 24). New Morgan Stanley Report challenges misperceptions regarding sustainable investing and performance. Morgan Stanley. Retrieved from https://www.morganstanley.com/press-releases/new-morgan-stanley-report-challenges-misperceptions-regarding-sustainable-investing-and-performance_32620b34-1e1c-47ef-a722-c8d1e43f5288

3. Frey, S., & Bar Am, J. (2023, February 6). Consumers care about sustainability-and back it up with their wallets. NIQ. https://nielseniq.com/global/en/insights/report/2023/consumers-care-about-sustainability-and-back-it-up-with-their-wallets/

4. N.A.. (2024, March). The Deloitte Global 2024 Gen Z and Millennial Survey. Deloitte. https://www.deloitte.com/global/en/issues/work/content/genz-millennialsurvey.html?ref=takeaways.tedditory.co

6. Sayani, A., & Kaplan, B. (2020, August). Comparing Risk and Performance for Absolute and Relative ESG Scores. https://www.msci.com/documents/10199/a645d4ff-b83e-426a-4636-e6fb81bbc599

7. Serafeim, G., & Yoon, A. (2021). Stock Price Reactions to ESG News: The Role of ESG Ratings and Disagreement. Working Paper 21-079. Harvard Business School. Retrieved from: https://insight.kellogg.northwestern.edu/article/esg-news-market-reaction

8. Global Sustainable Investment Alliance. (2019). Global Sustainable Investment Review 2018. Retrieved from https://sdg.iisd.org/news/gsia-report-finds-increase-in-sustainable-investing/

9. European Parliament. (2024). Corporate Sustainability Due Diligence Directive. European Parliament legislative resolution of 24 April 2024 on the proposal for a directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937 (COM (2022)0071 – C9-0050/2022 – 2022/0051 (COD)). Retrieved from https://www.europarl.europa.eu/doceo/document/TA-9-2024-0329_EN.html