Today, most companies have committed to improving their environmental, social, and governance (ESG) performance. However, ESG departments and initiatives are often seen as a cost or compliance obligation, rather than a benefit or source of positive return on investment (ROI) for companies. So what are the research-backed benefits of ESG? What's the ROI of operational ESG investment for CFOs and leadership teams?
One important distinction to make up front is the difference between ESG reporting and ESG doing (well). ESG reporting is a corporate communications practice designed to share ESG performance with company stakeholders like investors, employees, or the general public. The question is what is a company's ESG reporting sharing? Standout, data-backed achievements? Vague promises? Strong performance? Limited investment? It's the substance and sincerity that really matters.
The purpose of ESG isn't writing an ESG report, it's investing in all the initiatives inside a company that lead to business benefits and ROI which can then be shared in a report.
So what do research, data, examples, and case studies say about the benefits and ROI of ESG?
Environmental ESG activities include reducing greenhouse gas emissions reduction, carbon accounting, waste reduction and circularity, and managing climate risk. Here's some example data highlighting the ROI of sustainability:
HP generated $3.5 billion of commercial sales in 2021 from "new sales in which sustainability criteria were a known consideration and were supported actively by HP’s Sustainability and Compliance organization and Commercial organization."
Sustainable sourcing efficiency improvements helped Unilever realize over €1.2 billion in operational cost savings since 2008
Operating cost savings from manufacturing efficiency improvements that reduced product defects and waste
Company-wide improvement in profit margins for Nike by replacing certain shoe components with more sutainable materials and improving its supply chain sustainability practices
In cost savings by healthcare company Medtronic from 80+ energy efficiency projects completed in 2021 that reduce the company's energy usage and Scope 1 and 2 GHG emissions
Of companies report positive top-line impact from operational ESG investment, and more than half of companies noted a positive effect of sustainability improvements on overall company profitability
Sound ESG and sustainability strategy can also serve as an effective hedge against climate-related financial risks. For example, UPS made an equity investment in UK electric van manufacturer Arrival, with plans to purchase 10,000 vehicles from the company. UPS's CFO estimates that if the world's largest cities become more congested and polluted, governments will increasingly look to reduce traffic and car emissions through congestion charges and vehicle restrictions. If UPS delivery vehicles can't access a city (or have to pay high fees to do so if they run on fossil fuels), the financial risks to UPS's business could be much higher than the costs of buying EVs.
In total, Fortune 500 companies carry an estimated $2 trillion+ in financial risk from climate impacts, based on outside-in analysis and company ESG reporting.
For organizations looking to go further with sustainability ROI measurement, we recommend looking at NYU Stern's Return on Sustainability Investment (ROSI) methodology. If your organizing needs help with sustainability measurement or strategy, feel free to contact us directly.
Social ESG activities and intiatives include human rights, labor standards, workplace health and safety, employee diversity, equity, inclusion, and belonging, as well as social and community impacts. Social impact measurement is often more difficult to quantify than sustainability, which is one of the reasons why we built Brightest to enable safer, more efficient ESG reporting and measurement across all reporting categories.
Nonetheless, there's strong evidence that companies who prioritize strong social performance achieve significant benefits and positive ROI. For example:
Public companies with better social impact records had greater three-year investor returns and were more likely to become “high-quality” stocks, according to a Bank of America Merrill Lynch study which found strong ESG performers outperformed the market by 3-6% per year
A study of 140 US companies by Accenture found that companies who were leaders in diversity hiring, employment, and inclusion achieved, on average, 28% higher revenue, higher net income, and 30% higher profit margins
Of employees age 34 and younger say they want to work at a company that matches their personal values and does good in the world
Effective, transparent ESG and corporate social responsibility (CSR) programs can increase employee turnover by up to 50%, according to data and internal studies by Starbucks, Campbell, Babson College, and Glassdoor
Across the board, research, data, and case studies show that companies who practice and message strong ESG principles and performance are better at recruiting talent, better at retaining their employees, make their employees more productive, and are more profitable and innovative. For large companies, this can lead to revenue gains and cost reductions in the tens of millions of dollars each year.
Governance ESG activities and material considerations include company ownership structure, decision-making, corporate policies and oversight structures, leadership diversity, privacy and data security, investor relations, and corporate transparency.
Of institutional investors consider ESG factors in their investment decisions
Of investors see strong ESG and corporate social responsibility (CSR) performance as a sign of "ethical corporate behavior, which reduces investment risk" and an "indicator of a corporate culture less likely to produce expensive missteps like financial fraud."
Diverse management teams deliver 19% higher revenues from innovation compared to less diverse company leadership
The average cost of a corporate data breach or consumer privacy violation incident
Global ESG assets and investments will exceed $50 trillion dollars by 2025
While ESG may feel like a reporting obligation, dozens of data and examples show strong, thoughtful, and strategic ESG performance is a competitive business advantage that delivers positive ROI. Many companies start ESG work due to compliance and investor pressures, only to find that as their ESG investments, maturity, and capabilities evolve, their company realizes significant cross-company benefits and efficiencies.
Every company's ESG roadmap is different - and ESG truly is a long-term, strategic journey for boards and management teams. Nonetheless, the benefits of strong ESG performance on brand reputation, employee talent, culture, operational efficiency, risk management, and access to capital are not only numerous - many are quantifiable. And, as always, if we can help your organization unlock more ESG ROI, please be in touch.