While environmental, social and governance (ESG) reporting emerged as a preference and competitive advantage, it has since become a global corporate imperative. Now, companies are wrestling with it.
In early 2021, Ernst & Young (EY) surveyed directors of 400 public-held corporations. These directors noted that they are confident in their organizations’ governance comprising internal controls, practices and interchanges — all of which included regulators to identify and correct possible violations before they become problems.
On the other hand, the directors are far less certain of their companies’ reporting on environmental issues, which include sustainability, energy efficiency, climate change and waste management. They are also less confident in social regulations such as inclusivity, gender and diversity, human rights and labor standards.
They are not alone, and companies understand ESG’s value but are not sure how to do it well. The EY survey reported: “Markets are still in the process of defining how to effectively measure and report ESG performance, with ongoing market-driven and regulatory developments accelerating the pace of change and impacting stakeholder expectations.”
ESG Is a Risk-Management Strategy
There is nothing new about individual investors putting their money into firms whose social and environmental values align with their own. However, as social and environmental consciousness expands, financial and wealth management firms adjust their portfolios to include more companies that have integrated ESG reporting to attract investors, Deloitte Insights notes.
Despite the uncertainty about how and when regulators will provide uniform guidance on responsible social and environmental reporting, retail and institutional investors are trending strongly to ESG as a risk management tool.
Key messages from the Deloitte Insights report include:
- Professionally managed investment will grow three times faster in companies with ESG reporting than in those without ESG reporting.
- Asset management firms will launch 200 new funds in the United States with ESG reporting mandates, twice the number from the previous three years.
- Asset flows to companies that are deploying enterprise-level ESG reporting are growing faster than investments in companies with siloed processes.
“ESG is a lens into effective risk management and an avenue to optimize performance. It has to be credibly embedded into the investment management business model, all the way through to attracting talent,” the report concludes.
ESG Policies Are Growing Across the Economy
McKinsey & Company looked at ways robust ESG reporting creates value for companies in a variety of areas like transportation and consumer-packaged goods (CPG).
By being proactive and deploying ESG reporting mandates, 3M reconfigured sustainability processes to reduce costs by 2.2 billion dollars since 1975. Similarly, FedEx predicts it will reduce fuel costs by more than 50 million gallons by converting its ground fleet to electric or hybrid engines.
Moreover, ESG attracts customers, finding that “upward of 70 percent” will pay more for green products — ranging from automobiles and homes to electronics and CPG — that match the quality of those that are not, McKinsey reported.
A strong ESG proposition is also an increasingly important factor in recruiting and retaining motivated and productive employees, essential for both company culture and shareholder returns. The report notes: “Recent studies have also shown that positive social impact correlates with higher job satisfaction, and field experiments suggest that when companies ‘give back,’ employees react with enthusiasm.”
ESG Is Critical in Choosing Supply Chain Partners
As ESG becomes more critical in global regulatory compliance, investor confidence, competitive market advantages and employee satisfaction, companies will require enhanced supply chain visibility to gauge their partners’ commitment to environmental and social issues.
“Without quality supplier-related data, purchasing entities have a tough time working with the right suppliers. Subsequently, collaboration with the wrong suppliers could lead to unethical supplier actions, such as feeding back faulty data sets to the purchasing entity,” according to Kodiak Rating, a global supply chain consultancy.
ESG Expertise Opens Career Doors
Finance professionals can leverage ESG strategy’s impact on an organization’s internal and external assets and investments. An advanced degree program that includes training in global management, social and environmental sourcing and corporate responsibility will equip professionals for lucrative careers.
As a graduate of Bowling Green State University’s online MBA with a concentration in Finance, you will have a firm foundation for success in an increasingly critical element of a corporation’s success: ESG strategy.
Learn more about Bowling Green State University’s online MBA with a concentration in Finance program.
