5 Reasons to Include ESG in Your 2022 Strategic Plans

Authored by: Mary Tressel, Practice Leader, ESG Services at Armanino LLP

Today, there is greater demand than ever for companies to be accountable to their stakeholders.

The impacts of climate change, social unrest, changing demographics, disruptive technologies and other factors have radically reshaped expectations and proved that financial results alone aren’t enough. Investors, employees and customers take a hard look at a company’s environmental, social and governance strategies, practices and performance when deciding where to invest, work and shop.

What is ESG?

Environmental, Social and Governance (ESG) is a more stakeholder approach to doing business that focuses on long-term, non-financial metrics in the following areas:

Environmental

  • Climate action
  • Natural resource management
  • Responsible consumption and production

Social

  • Labor standards
  • Diversity and inclusion
  • Community impact

Governance

  • Stakeholder model implementation
  • Management structure
  • Organizational change management

Companies that adhere to ESG standards agree to conduct themselves ethically in these three areas and employ a range of ESG strategies.

Top 5 Reasons to Include ESG in your 2022 Strategic Plans

Incorporating ESG principles in your business strategy is no longer just a “nice to do” — it’s a business imperative. Without an effective strategy for addressing these areas, business leaders leave themselves open to ESG risks and miss out on ESG opportunities.

1. Follow the money

While financial performance is still a major factor, when Willis Towers Watson surveyed board members and senior executives from around the globe, 78% indicated they believe ESG is a key contributor to strong financial performance.

However, this isn’t just a gut feeling. The International Finance Corporation found that companies with good environmental and social performance tend to outperform low performers by 210 basis points on return on equity and 110 basis points on return on assets.

2. Command premium pricing

Companies that demonstrate positive ESG contributions can command premium pricing for their products and services because customers are attracted to sustainable and safe products.

They’re also able to attain premium valuations for their shares. According to McKinsey, most C-suite leaders and investment professionals say they would be willing to pay about a 10% median premium to acquire a company with a positive record for ESG issues over one with a negative record.

3. Avoid backlash from greenwashing

Without a solid ESG strategy and practices, it’s easy for companies to fall into the “greenwashing” trap. Greenwashing occurs when a brand, eager to share with stakeholders what it is doing in an ESG area, intentionally or unintentionally misrepresents its ESG activities.

Greenwashing can lead to reputational backlash as well as legal scrutiny, bringing negative media coverage, class-action lawsuits, advertising challenges from competitors and increased scrutiny from the Federal Trade Commission and other regulators.

4. Get the credit you deserve

Increasingly, ESG is being incorporated into credit ratings. According to a report from ING, over 30% of Standard & Poor’s rating actions in the corporate sector between April and December 2020 were affected by ESG factors, of which 14% were related to environmental issues. And in 2019, 33% of Moody’s private sector rating actions cited ESG factors as material credit considerations.

Accordingly, financial institutions have developed sustainability-linked loans (SLLs), which tie favorable loan terms and interest rates to superior ESG performance metrics.

5. Reap the rewards of being an early mover

The European Commission recently enacted Sustainable Finance Disclosure Regulation, and U.S. regulators will follow in creating specific rules for the sustainability-related information companies need to disclose.

However, sitting idly by is a losing strategy. Once U.S. regulations catch up, companies without an ESG game plan will be at a disadvantage. On the other hand, forward-thinking organizations that begin implementing ESG strategies will have time to experiment, explore and play an active role in shaping the conversation.

Don’t wait for the International Sustainability Standards Board reporting requirements before taking action. Start assessing your current state and developing your ESG strategies now to be market leaders and prepare for ESG regulations to be enacted in your jurisdictions.

Please visit our Environmental, Social and Governance Advisory Services page for assistance with assessing your current ESG efforts and building a roadmap to move forward.

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