In a highly charged political climate in which agreeing to disagree is the norm, there is at least one issue where everyone shares a common, global point of view: We all want a better, more sustainable environment. So much so, that over two-thirds of Americans say they prefer to buy from businesses that are stewards of the environment, according to a survey conducted by Gallup. Consumers also like to buy from companies that go out of their way to prioritize the health and well-being of their employees, with 8 in 10 saying this is something that matters to them a “great deal.”
In short, buyers believe that ethics matter, which is why so many organizations are starting to develop environmental, social, and corporate governance (ESG) strategies and investment plans. But if you were to ask the typical person what ESG is all about, nearly half of the country (42%) would not be able to tell you. In this blog, we will discuss what ESG refers to, why it is garnering so much interest, and why an increasing number of companies are putting more of their collective energies toward creating, designing, and implementing their own ESG strategy.
What is ESG?
ESG refers to the business practices organizations — typically multinational corporations — are taking toward creating a more sustainable world. In addition to concrete measures that strengthen the physical environment (e.g., diminishing greenhouse gas emissions, reducing pollution, minimizing waste, buying carbon offset credits, etc.), this also refers to social initiatives (e.g., diversity, customer satisfaction initiatives, equity and inclusion, employee relations, human rights, labor standards, funding projects, etc.) as well. Governance refers to what a corporation is doing to avoid potential issues involving malfeasance (e.g. bribery, corruption, etc.) and ensuring decision-makers — such as boards of directors and senior executives — have minority representation.
To say that the popularity of ESG initiatives is growing — both in terms of ESG investing and companies formulating their own ESG strategies — is to dramatically understate the case. In 2019, for example, inflows to ESG-focused investments totaled approximately $25 billion, CityWire reported from MorningStar data. That has since more than doubled, topping $54 billion through the first three quarters of 2021.
Why do ESG strategies matter to businesses?
Perhaps now more than ever before, people throughout the world are more in touch and connected with their surroundings and focused on how to make society a better place. Individuals are especially prioritizing issues like climate change, which much of the scientific community believes has played a role in the increase in extreme weather events. In the past two years, for example, 33% of Americans say they have been impacted by some kind of climate-related incident, be it a hurricane, tornado, ice storm, or blizzard, according to a separate Gallup survey. This includes 13% of West Coast residents who have felt the effects of wildfire, a phenomenon that now plagues the West every summer.
The evidence certainly suggests extreme weather events are occurring more regularly. Hurricane Ian, which caused massive flood and wind damage in Florida this past September, was the 15th billion-dollar climate disaster in 2022 alone, according to the National Oceanic and Atmospheric Administration. Among those affected by extreme weather, close to 80% of respondents in the aforementioned Gallup poll do not believe the government is doing enough to protect the environment, with 78% saying climate change poses a “serious threat” to their way of life.
The climate-conscious are focused on what actions can be taken to reduce the impacts of global warming, whether that is through behavioral, social, or policy changes or a combination of all three. Since many consumers aim to patronize companies that share their concern about the environment— as the aforementioned Gallup poll highlighted — ESG efforts led by companies are a way to tell investors that corporations are trying to be a part of the solution.
Do investors care about ESG?
As it pertains to ESG, investors and companies have a reciprocal relationship: As business owners increasingly devote more of their financial resources and wherewithal toward improving the environment and creating a more equitable society — something their customers want — investors are buying stock in these companies, with 48% of investors saying they are interested in sustainable investing. Conversely, the growth in ESG investing is incentivizing businesses to focus on creating their own ESG strategy, if they have not already. The fact that ESG is a trillion-dollar industry suggests that investors do care about ESG strategies.
Similar to everyday consumers, though, active awareness of ESG and ESG initiatives remains low. The poll shows that only 1 in 10 investors with at least $10,000 or more invested in the stock market are actively involved in ESG investing. Clearly, ESG investing has room for growth, particularly in the United States relative to Europe, which in 2018 accounted for roughly half of global ESG assets. But ESG is not a fad or flash in the pan; it will only become further entrenched in society over time. Bloomberg Intelligence reports that global ESG assets are poised to reach a valuation of $50 trillion by 2025 at the current rate of annual growth.
“The trend of growing ESG is in line with our bull-case scenario, which assumes a 35% growth, and we expect $1.3 trillion entering such ETFs (exchange-traded funds) globally by 2025,” said Adeline Diab, Director of ESG Research at Bloomberg Intelligence. Diab added that roughly 10% of all global ETF flows last year were in ESG investments.
How are ESG strategies changing companies?
The repercussions of the lockdowns triggered by COVID-19 demonstrated just how fragile supply chains are. To strengthen them, more companies and governments are focusing on supply chain sustainability. Supply chain sustainability refers to the steps supply chain actors — like manufacturers and distributors — take toward mitigating the impacts commerce has on the environment. This includes every phase of the product lifecycle, from development to decline.
In a post-pandemic world, 80% of companies say they have either increased or maintained momentum in their supply chain sustainability efforts. That is according to a poll conducted by the Center for Transportation & Logistics at MIT, which included responses from over 3,300 business owners and interviews with more than a dozen corporate executives. These efforts can be wide-ranging, as the supply chain has many interconnected parts and strategies. These may include using biodegradable packaging materials, reusing waste, cutting back on inventory, investing in clean energy transportation (e.g., zero-emission trucks), and collaborating with sustainable suppliers.
ESG considerations have touched just about every industry as well. One online fashion retailer, SHEIN, announced in September that it seeks to cut carbon emissions across its entire supply chain by 25% or more by 2030. It also plans to reduce emissions from its operations by 42% over the same period. Adam Whinston, Global Head of ESG at SHEIN, said reducing the company’s carbon footprint is a priority for the company, whose popularity has exploded in recent years. “Today we’re taking a significant step forward, announcing a new set of 2030 goals that will help us accomplish emissions reduction targets for our entire supply chain over the next seven years,” Whinston said in a press release.
Soft drink conglomerate PepsiCo is also prioritizing sustainability toward the goal of achieving net zero carbon emissions by working with its raw material suppliers. For example, the company announced that the regenerative agricultural practices it is encouraging growers to incorporate into their farming activities may be able to cut greenhouse gas emissions by three million tons by 2030 at the latest. Roberta Barbieri, Vice President of Global Sustainability at PepsiCo, said the company is committed to being a good steward of the environment and to encouraging others to join the movement. “We have to do more than just minimize our own environmental impact — we must influence the larger system to decarbonize along with us if society is to deliver the transition needed to avert a climate crisis,” Barbieri explained. “PepsiCo is committed to reducing emissions in our own operations and supporting our business partners on this journey by sharing best practices, building capabilities, and collaborating on solutions.”
Many other household name companies are also involved in sustainability initiatives, supply chain-related or otherwise. Here is a partial list:
- Coca-Cola
- Hewlett-Packard
- Adobe
- Sherwin-Williams
- Motorola
- IHS Markit
- Nike
- John Deere
- Thermo Fisher
- Eli Lilly
- Alphabet (Google)
- Mattel
- Crown Holdings
- Yum Brands
What is the biggest challenge for companies supporting ESG?
The purpose of ESG is to make the planet a better place for everyone to inhabit. As well-intentioned as moving forward with an ESG strategy may be, ESG efforts are of little value if they do not actually produce change. Companies must demonstrate the results of their efforts through ESG reporting. The problem is that there are many different standards and frameworks that organizations rely on for guidance when putting ESG reports together. In fact, according to a study done by Financial Executives, 85% of companies use several ESG reporting frameworks, rather than just one. Using one would make ESG reporting more standardized.
Additionally, a core component of accurate ESG reporting is measurement. David Correll, Research Scientist with the MIT Center for Transportation & Logistics, told The Wall Street Journal that because supply chains are often massive in size and scope, it is hard for companies to accurately measure whether their supply chains have made any headway in improving sustainability since they began implementing ESG strategies. “Even a simple item like a diaper can have up to 50 component pieces,” said Correll. “Something like an automobile will have tens of thousands. So brands at the ends of supply chains, particularly consumer-facing brands, really have trouble measuring the environmental and social sustainability of the thousands of disparate vendors that serve them. And this is a big struggle for managers, even managers for whom supply chain sustainability is a big priority.”
If your organization is interested in formulating ESG strategies, Inspirage is here to help. From our supply chain experts to our data management and reporting expertise, our team is ready to help your ESG initiative pay dividends. We can help you put the right systems and processes in place to set you on the right path toward your environmental and social goals. For more information, contact us today.
