In the past few months, there have been numerous reports about the waning importance of ESGs. Some even called the rise of the importance of sustainability and it’s ESG KPIs as a form of tyranny. The general coverage seems to indicate that businesses are now leaning back towards being more profit-oriented rather than sustainability centric. Observers might feel that the tide has indeed shifted back and the status quo has been re-established as industry leaders seem to have been back peddling on their sustainability commitments.
Take Dutch oil giant Shell for example. Shell embarked on an ambitious sustainability journey including prioritizing the inclusion of sustainable energy sources to their business model. This was initially lauded by staff, investors and commentators and it set off a trend where energy companies moved towards more sustainable practices.
Fast forward a few months and a change of leadership occurred which resulted in Shell quietly backing down from its ESG centric pledges in favor of focusing more on profitability and creating shareholder value. Whilst this did not receive a major push back externally, Shell found itself facing internal pressures from staff who felt that they wanted to be part of an organization that tried to act more sustainably. However, this has not resulted in tangible changes to Shell’s focus.
The reality is that businesses exist to make money and asking them to sacrifice a percentage of their profits in order to operate more sustainably is a difficult ask. Especially when the very nature of success (and the performance rating of Sr. Leadership) is defined by KPIs such as revenue growth.
However, as Sustainability becomes ever increasingly ingrained in the mindset of the public, companies will find themselves scrambling to market their products and even attract talent whilst carrying out their profit-first ideology.
Let's look at the facts.
A 2022 survey showed that 79% of consumers considered the social and environmental impact of their purchases. In addition to this, a 2023 survey showed that 50% of consumers are willing to pay more for goods and services which are deemed to be more sustainable.
The same survey showed that 66% of people considered sustainability before making a luxury purchase. 64% of respondents indicated that they felt better about their decisions when they knew that an item day purchase is sustainable. Finally 54% of respondents claimed to have switched to more sustainable products.
Overall the picture is clear - consumers feel that sustainability is important and they are willing to put their money where their mouth is.
Inversely, only 24% of companies surveyed feel that consumers will change their buying practices to support sustainability. As a matter of fact a 2023 survey shows that companies that have put in efforts to be more sustainable, have a 34% repeat purchase rate annually. Moreover 68% of the time, sustainable products outperform their non-sustainable competitors.
This gulf between consumer and seller proves one thing - companies might be willing to ditch sustainability but consumers are not.
As a matter of fact, this sentiment does not seem to be confined to consumers. The same 2023 survey said that 70% of employees and candidates said that a well defined sustainability program made an employer more attractive. Similarly, 44% of hiring managers said that their company’s ESG strategy played a part in the conversation when recruiting talent.
Again - the trend is clear - stakeholders want to be associated with companies that operate with sustainability at the forefront.
Then why do companies feel that Sustainability is not important?
The fact is that, more often than not, companies recognise the importance of sustainability but they do not prioritize it. This is either because these companies want to utilize their resources towards products that are seen to be more profitable or simply because the company just does not know where to start. Yet, neither one of these statements are so difficult to overcome so as to prevent an organization from operating in a sustainable manner.
First of all, the argument that profitability is more important than sustainability, whilst potentially being true, shields itself from the fact that companies do not need to choose between sustainability and profitability.
As illustrated above, companies with strong sustainability targets that they move towards achieving are more likely to retain the loyalty of the customers even in the face of an overall price increase. The increasing popularity in services such as refillable milk containers at select Malaysian supermarkets, is proof that customers are willing to pay for and support a company's sustainability efforts.
On the other side of the profitability equation lies the cost of doing business. Here too, there are major advantages of operating in a sustainable manner. Not only can companies reduce operational costs, they could even reduce finance costs.
It is easy to understand how sustainability helps operational costs by keeping consumables low. Policies to reduce wastage in terms of paper, energy, water and even employee's time tend to save the company money. Strong employee safety policies, even those that could have a detrimental effect on productivity, could end up saving the company money in potential lawsuits and fines from the government.
However, what is slightly more complicated to understand is the emerging linking of sustainability elements with finance and finance costs. In 2021 the Etiqa Group entered into the first financial agreement with sustainability KPIs. This enabled the company to save money in interest payments to the lending Bank if and only if they hit certain, pre-agreed upon sustainability KPIs. This allows the company to point to the sustainability efforts and translate them to a dollar value, thus keeping the profitability predators at bay.
Finally companies that have sustainability elements are more likely to get financing from external sources. The green investing market space has grown to about USD $3.7 billion dollars in 2023. This money whilst not available to everybody is money that is currently being invested in companies that have sustainability targets and strategies. Green indexes such as the FTSE4Good index grades companies not on their financial performance but on their sustainability performance. Similar to normal stock indexes, the higher company rates, the more they are able to value their company. This enables high levels of financing and creates stockholder value.
As mentioned earlier, the other reason for companies to not get started on their sustainability journey is a general sense of confusion about sustainability, especially around how to set KPIs and report on the company’s sustainability efforts. Yet, even then, government bodies, the Securities Commission and international consultancies have all put forth documentation and guides to help companies get started in their sustainability journey. Whilst these are generally speaking good, they operate in a largely “self-work” capacity and serve mainly to simplify some of the more complex topics rather than provide a whole scale understanding of the concept and requirements.
Dicorm’s ESG 101 class is designed to introduce attendees to sustainability and to answer the question - why it is important. As a matter of fact, attendees of Dicorm’s ESG 101 training reported a 40% increase in the understanding of sustainability and the ESG driven KPIs that serve as sustainability indicators. Our training is available in either a one or two day format and can be customised to suit your individual needs. However, if your organisation has started its journey into sustainability and you have begun the process of tracking and reporting your sustainability efforts, Dicorm’s ESG 201 is a half day course designed to help you in these efforts. Interested to learn more? Contact us today for a free, no obligation consultation.