The topic of ESG investing has been growing throughout the years.
Today, more than ever, asset managers, professional investors, business owners, and funds in general, are seeking new ways to create investment decisions that benefit society and the environment as a whole.
Within these last years, there has been a significant surge in assets, funds and overall investments linked to ESG principles.
According to Morningstar (February, 2021)[1], flows into ESG funds increased to 233 billion of euros in 2020 versus 126 billion of euros in 2019.
In fact, in order to respond to the increase in market demand, about 505 new ESG funds were launched in 2020.
Although there is an exponential demand for ESG investing, there are some doubts regarding this investment approach.
There are investors that ask themselves, how can ESG enhance investment returns?
The following article takes a dive into ESG investing and the benefits it brings in order to enhance returns in the long-run.
Efficiency and cost savings
Companies that implement ESG practices may be able to increase efficiency and as a result improve cost management and improve overall profits.
According to McKinsey (November, 2019)[2], entities that implement a strong ESG proposition can reduce their costs by implementing strategies that manage water use and energy consumption.
Take for instance Alcoa which implemented environmental best practices that gave raise to significant reductions in:
electricity use (-15%), water use (-75%), reduction in soluble concentration of sliver, suspended solids, and hydrocarbons in wastewater (-100%) in 2011.
These reductions among other similar practices resulted in about 1.5 million of dollars in annual savings (Witenberg, 2014)[3].
Another example is Hilton Worldwide which implemented a sustainability strategy in 2009 that helped the company reduce:
waste output (-27.6%), reduce carbon output (-20.9%), reduce water use (-14.1%), and energy use (-14.5%).
These reductions led to savings of 550 million dollars from 2009 to 2016 (Hardcastle, 2016)[4]. Last but not least, a publication of Harvard Business Review[5] made reference to Wal-mart, which aimed to double fleet efficiency between 2005 – 2015 through strategies that improved fuel efficiency by 87% and created savings of about 11 million dollars.
These three examples, among many more serve as prime examples on how implementing sustainable efficient practices, lead to improvements in overall company profits (correlated to cost reductions), which as a consequence tend to result in return enhancements.
Labor Productivity
Another benefit of implementing ESG factors, into daily business activities, is the improvement of labor productivity and overall working conditions.
According to McKinsey (November, 2019), a solid ESG proposition can aid to increase employee motivation by implementing a “sense of purpose” (example business practices that help society), attract quality employees, and improve retention rates.
Additionally, McKinsey states that employee satisfaction and shareholder returns are positively correlated.
In fact, the London Business School’s Alex Edmans discovered that the companies that made Fortune’s “100 Best Companies to Work For” list generated about 2.3% to 3.8% of higher stock returns per year compared to other peer companies.[6]
Hence, companies that adopt ESG policies create higher satisfactory working environments that lead to an increase in labor productivity and overall higher returns.
Consumption
Implementing ESG factors into business activities can induce customer loyalty and even entice new sales.
A survey conducted by PwC (December, 2021)[7], demonstrated that consumers pay attention to sustainability more than ever.
About 52% of respondents stated that they are more eco-friendly (+2% since June 2021).
Additionally, half of the individuals interviewed took into consideration factors connected to sustainability when purchasing products.
Last but not least, it is important to consider that this trend started more than a couple of years ago.
In fact, in 2015, Unilever stated that “brands with purpose” depict double the growth compared to other brands.[8]
The shift in consumer preferences for eco-friendly products and products that benefit society as a whole portray a constant increasing demand.
The implementation of ESG into business practices can lead to an increase in brand loyalty and attract new customers (attracting the new generations that look for sustainable practices). This raise in demand will help companies maintain and increase future revenue levels.
All of these aspects will surely accelerate profit growth and enhance investment returns.
[1] Morningstar Manager Research. European Sustainable Funds Landscape: 2020 in Review A Year of Broken Records Heralding a New Era for Sustainable Investing in Europe. February 3, 2021. Retrieved from https://www.morningstar.com/content/dam/marketing/emea/uk/European_ESG_Fund_Landscape_2020.pdf
[2] McKinesy & Company. Five ways that ESG creates value. November 14, 2019. Retrieved from https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-ways-that-esg-creates-value?cid=soc-web.
[3] Wirtenberg, J. (2014). Building a culture for sustainability: people, planet, and profits in a new green
economy. ABC-CLIO. Retrieved from https://www.stern.nyu.edu/sites/default/files/assets/documents/CSB_Business%20Case%20for%20Sustainability_04.2017_0.pdf
[4] Hardcastle, J. (2016). Hilton cuts carbon output 20.9%, saves $550M.
http://www.environmentalleader.com/2016/01/07/hilton-cuts-carbon-output-20-9-saves550m/
[5] Harvard Business Review. The Comprehensive Business Case for Sustainability. October 21, 2016. Retrieved from https://hbr.org/2016/10/the-comprehensive-business-case-for-sustainability
[6] Alex Edmans. Does the stock market fully value intangibles? Employee satisfaction and equity prices. Journal of Financial Economics, September 2011, Volume 101, Number 3, pp. 621–40, sciencedirect.com. Retrieved from https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-ways-that-esg-creates-value?cid=soc-web
[7] PwC. A time for hope: Consumers’ outlook brightens despite headwinds. December 2021. Retrieved from https://www.pwc.com/gx/en/industries/consumer-markets/consumer-insights-survey.html?utm_campaign=sbpwc&utm_medium=site&utm_source=articletext
[8] Campaign. Unilever says ‘brands with purpose’ are growing at twice the speed of others in portfolio. May 5, 2015. Retrieved fromhttps://www.campaignlive.co.uk/article/unilever-says-brands-purpose-growing-twice-speed-others-portfolio/1345772?src_site=marketingmagazine