Climate change and sustainability are forcing people to think differently and, as a result, stakeholder priorities are changing. Increasingly, stakeholders are demanding more from organisations than a commitment to short-term profitability.
Every organisation is going to need to adapt to understand what this change in value perception means to them and to pivot what they do today to support wider environmental, social and governance (ESG) outcomes in the future.
We see six key ways businesses can benefit by moving to more sustainable business models.
1 Increased Investor confidence
Developing robust ESG reporting and disclosure can build confidence with both new and prospective investors. ESG is fast becoming integral to investor decision making, with non-financial factors now being considered important to an organisation's value creation.
The 2021 EY Global Institutional Investor Survey found that 78% of investors said they conduct a structured and methodical evaluation of ESG disclosures — when just three years ago, only 32% used this rigorous approach. We expect this upward trajectory to continue as ESG becomes part of the normal course of business.
This current investor sentiment towards ESG aligned organisations can translate into:
- Increased share price
According to 89% of institutional investors across major markets, companies with strong ESG performance deserve a premium valuation to their share price. And 90% agree that companies that prioritise ESG initiatives represent better opportunities for long-term returns.
- Access to a lower cost of capital
As capital markets look to reprofile investments away from fossil fuel intensive portfolios, they are offering preferential cost of capital for sustainability linked lending. A four-year study by MSCI Inc found that, on average, companies with high ESG scores experienced lower costs of capital compared to companies with poor ESG scores in both developed and emerging markets. This 'Greenium' is expected to be a short-term premium while the market rebalances towards greener alternatives and therefore is likely to be most accessible to those who move fast in adapting towards a more ESG aligned business model.
2 Financial savings through greater efficiency
By spurring innovation across their organisation, businesses can implement more sustainable practices while also driving financial savings. Initiatives that target waste reduction or improving energy efficiency, for example, can drive down costs, reduce carbon emissions, and enable a more future proof economic model. Analysts have drawn parallels between the scale and scope of the sustainability opportunity to that of the industrial revolution.
3 Enhanced brand reputation
As consumers increasingly prioritise environmental and social impact, they will inevitably seek products and brands that align with their values.
According to EY's research, 73% of global consumers believe brands have a responsibility to make a positive change in the world.
80% of global consumers believe brands must be transparent about their environmental impacts in the production of their goods and services.
54% of global consumers have reduced, or stopped altogether, purchasing from organisations they believe acted inappropriately on environmental or social issues.
Companies that act quickly to become more sustainable, and do so with transparency and credibility, can build strong customer loyalty and attract new customers.
4 Increased operational resilience
With the commitments made during COP26 last year, there is increased impetus to drive decarbonisation through market instruments such as taxes and grants and increased environmental and social regulation. Organisations will need to respond to the opportunities and challenges that these changes will likely bring.
The proactive monitoring and managing of climate- related risks and adopting ESG measures enhances risk management and corporate governance and builds organisational resilience against the risks of climate change. For example, introducing measures such as internal carbon pricing can drive innovation and build preparedness for carbon taxes.
5 Competitive advantage over those who don't act quickly enough
Businesses, and in particular start-ups, are adapting fast — sparking significant innovation that may well out-pace traditional market participants. However challenging it may be, it pays to be an early mover.
By developing market share, fast moving organisations can exploit the competitive advantage gained in rapidly growing new markets. Acting quickly provides the best chance of turning the risks of climate change into opportunities.
6 Attraction and retention of talent
People increasingly want to work for purpose-driven organisations, and businesses will have issues with recruitment and retention of the best talent if they don't accurately and genuinely articulate their purpose, backed by credible action. Higher costs of staff turnover will impact organisations' bottom lines as well as the capability of organisations to deliver. For the finance function, playing a key role in supporting the sustainability transition will make a role in finance genuinely appealing to the top talent of the future.
Clearly then, enabling successful sustainability transformation can generate numerous benefits, and acting quickly can help to maximise them.
By Paul O'Flaherty Africa Head of EY-Parthenon, EY's Strategy Consulting arm