Businesses Must Focus On Fundamental Performance, Not Just ESG (2024)

FAQs

Businesses Must Focus On Fundamental Performance, Not Just ESG? ›

By prioritizing strong fundamentals and sound business practices, companies can achieve long-term success and sustainability. The pursuit of ESG goals must align with a business's core competencies and strategic objectives, rather than being driven by external pressures or fads. Follow me on Twitter or LinkedIn.

Many companies and shareholders often overlook the full implications of not adhering to Environmental, Social, and Governance (ESG) standards. Even if you might not place much value on ESG, those who support your business do—and they won't hesitate to make their feelings known.

ESG framework helps identify, organise, analyse, prioritise and accordingly guide decisions on various business risks.

Cost reductions ESG can also reduce costs substantially. Among other advantages, executing ESG effectively can help combat rising operating expenses (such as raw-material costs and the true cost of water or carbon), which McKinsey research has found can affect operating profits by as much as 60 percent.

For some, the rise of ESG funds is a threat. They don't want to see the world use the leverage of finance and reporting to address shared challenges; it would reduce their power.

One of the most vocal criticisms regarding ESG is its perceived vagueness and inconsistency. The lack of a universal framework or standardized guidelines has led to companies interpreting and reporting ESG metrics in varied ways.

From an investment perspective, strong ESG practices make a company more attractive to a growing pool of socially responsible investors. These investors often view companies with robust ESG frameworks as lower-risk investments, given their proactive approach to managing environmental, social, and regulatory challenges.

However, there are also some cons to ESG investing. First, ESG funds may carry higher-than-average expense ratios. This is because ESG investing requires more research and due diligence, which can be costly. Second, ESG investing can be subjective.

New McKinsey research finds that companies that courageously pursue stronger growth and profitability while improving ESG performance deliver superior shareholder returns.

Successful companies are implementing ESG strategies that increase financial, societal, and environmental impact as well as ensure long-term competitiveness.

Why is ESG so important now? ›

The transition to a decarbonised future is likely critical to the long-term resilience of companies, the economy and the planet as a whole. Strong ESG strategies and frameworks should be vital to economic recovery and for companies to thrive in the long term.

In both its aspects: in reducing risks/costs and increasing revenues. Systematic and disciplined application of ESG leads to reduced risks, which leads to reduced cost of doing business. Several companies have been creating value through specific ESG cost reduction initiatives that are at a department or unit level.

Brand value and consumer trust: A strong ESG focus helps showcase commitments that resonate with ethically minded shoppers. In addition to attracting more customers, ESG disclosures help buyers identify businesses aligned with their social and environmental values.

The SEC launched the Climate and ESG Task Force within the Division of Enforcement to develop initiatives to proactively identify ESG-related misconduct consistent with increased investor reliance on climate and ESG-related disclosure and investment.

In December 2022, Florida announced that it was taking $2 billion out of the management of BlackRock, the world's largest asset manager (and biggest lightning rod for ESG criticism). This was the largest such divestment thus far. These attacks have been coordinated.

The ESG movement, originally driven by good intentions, has been co-opted by lobbyists, special interest groups and various NGOs, and recent reviews have revealed its lackluster performance in creating meaningful environmental change and have highlighted chronic abuse of flawed methodologies.

According to the articles Stuart cites, the answer is yes. For example, from the paper by Alves, Krüger and van Dijk: We aim to provide the most comprehensive analysis to date of the relation between ESG ratings and stock returns, using 16,000+ stocks in 48 countries and seven different ESG rating providers.

With an estimated $17 trillion in sustainable investment capital on the line, the stakes are high for companies and investors to make sound ESG decisions. To do this, institutions such as asset managers, pension funds, and endowments, often rely on ESG scores.

“Consumers are indeed backing their stated ESG preferences with their purchasing behavior,” the report reads. “Over the past five years, products making ESG-related claims accounted for 56% of all growth—about 18% more than would have been expected given their standing at the beginning of the… period.”

The investor imperative

Shareholders and other investors also expect to see organizations making formal pledges to ESG standards before they commit funds. In short, conforming to ESG principles is clearly not just a box-ticking exercise: it could mean losing out on business, or funding, or both.