The responsible enterprise
Historically many companies have treated ESG (environmental, social and governance) issues as important but tangential to the core business. More often than not, these issues were managed as secondary activities with an indirect connection to the core business and bottom line.
The market is undergoing a significant shift, with companies increasingly expected to address ESG issues head on. ESG is becoming a C-Suite issue and is expected to have a material impact on the bottom line. A recent Deloitte survey found two-thirds of global CFOs expect their role in ESG-related strategies to increase over the next two years. There are several factors driving this trend including loss of trust in business, stakeholder pressures, natural resource constraints, supply chain pressures, and social and mobile enablement.
Most companies would agree that the trend exists. Now the question becomes – what does this mean in practice? Can responsible enterprises create shareholder value?
PINCH, PUSH, SHIFT
Aligning ESG issues with commerce can help companies create shareholder value in three increasingly measurable ways: pinch, push, and shift.
Pinch. Downside risks should be reduced or “pinched,” especially in a global marketplace that is increasingly volatile, resource-constrained, and socially engaged. One way to do this is by integrating ESG and financial reporting, which can improve understanding of the financial implications of ESG risks, and help drive targeted mitigation strategies. Improved transparency can also help build trust with customers, investors, and employees, creating a halo effect that makes it easier for a company to earn forgiveness when things go wrong, while getting more credit for things it is doing right.
Push. Companies can also leverage social and environmental issues to create new products and services that drive revenue and reduce operating costs. Deloitte’s research on innovation shows that leaders on ESG issues are more than 400 percent more likely to be considered innovation leaders. For example, Nike’s Considered Design initiative has enabled the company to recycle 82 million plastic bottles into high-performance sportswear, reduce waste by 19 percent in its footwear business, increase the use of environmentally preferred materials by 20 percent, and achieve a 95 percent reduction in volatile organic compounds. In addition, a Deloitte ESG survey shows that 32 percent of senior executives expect more than 5 percent of annual revenue growth to come from products and services that reduce environmental and social impacts in the next couple of years.