The Environmental, Social and Governance mandate has become a core component of what businesses need to take on. What they should do is adopt these practices without cutting cost corners. Image Credit: Shutterstock

Sustainable practices are strategic business moves. When viewed as more than the perfunctory nod to social responsibility, they can directly impact profitability.

Although the acronym is fairly new to corporate lexicon, the ‘Environmental, Social & Governance’ (ESG) principles have gained rapid familiarity as companies adopt, or at least acquaint themselves, with these issues. Much of the mist around these topics is now clearing, with the exception of how it can - and will - affect the bottom-line.

Top-performing companies don’t make trade-offs between sustainability, societal needs, good governance, and shareholder value – they achieve these outcomes at once.

The ‘triple bottom-line’ rests on the premise that the company does not care only about profits, but about people and the planet too. A company is said to act sustainably if it pursues all three goals with equal priority.

Even for a company that is just starting off, streamlining operations with an ESG outlook can result in long-term savings and contribute significantly to its singular bottom line. Contradicting the widely-held belief that sustainable practices are expensive, ESG initiatives can lead to actual cost savings and increased efficiencies.

Companies with strong ESG performances will gain a competitive advantage in attracting customers, leading to increased market share and revenues. Contemporary investors seek out companies with strong ESG performance in the belief that effective practices reduce the likelihood of financial losses in adverse times.

Another undeniable –  even if largely invisible –  aspect of ESG’s impact on profits is resilience. Companies that integrate ESG into their operations can weather storms more easily and effectively than their peers. It is a simple fact that companies will be able to face unexpected shocks and hardships if they are managed for the long-term and are in line with global mega-trends such as inclusion, gender equality, fair employment, and climate change.

An ESG approach, in combination with traditional financial analyses, can also decrease risk. It acts as a buffer by reducing risks and ensuring more robust responses to unforeseen events, whether they are related to social changes or climate challenges.

Risk management

In effect, companies that embed sustainability into their everyday operations are future-proofing themselves for changing consumer preferences, evolving regulations, and global challenges. Although it may not apply to everyone, companies that adopt effective ESG risk management practices are also able to reduce their exposure to regulatory and reputational risks.

There are clear benefits in the form of operational efficiencies: ESG measures such as reducing waste, strengthening relationships with stakeholders, and improving regulatory compliance are good business practices - but in many industries, they are now yardsticks that gauge competitiveness.

For firms of any size, going green is not just environmentally responsible but financially astute. Sustainability should not be seen as an expense; it is an investment that pays dividends in resilience, cost-efficiency, greater investor and customer appeal, employee loyalty and reputational brand value.

While it is a responsibility for companies to act in the best interest of all stakeholders, it becomes a long-term competitive advantage for the ones that do.

ESG requires that collective buy-in

Implementing new governance policies, making changes to the workforce, or acting on reducing emissions can be lengthy processes. Yet, they have to be kick-started, and it is important that the entire organization - from the C-Suite downwards - doubles down on the ESG imperative. And the collective effort it calls for…

The strategic challenge for corporate leaders is to be foresighted about the ESG themes that are still emerging as important industry drivers - and to identify them before their competitors do.

Taking shortcuts is not the pathway to achieving sustainable competitive advantage. In times such as these, every company must invest in the new ingredients of profitability - people, communities, and the environment.