More than $US30 trillion has poured into global sustainable investments, up 64 per cent since 2014, according to a discussion paper by McKinsey and Company which seeks to describe how approaches to environmental, social, and governance (ESG) concerns build business value.
According to the management consultancy, paying attention to ESG does not compromise returns. In fact, it adds to growth.
While there is a growing recognition of the relationship between a strong ESG culture and success, the reasons for this can seem opaque.
However, McKinsey and Co now says ESG links to cashflow in five important ways:
- facilitating top-line growth;
- reducing costs;
- minimising regulatory and legal interventions;
- increasing employee productivity;
- optimizing investment and capital expenditures.
McKinsey has tracked the impact of sustainability on business for well over a decade. And now, it seems, business is finally catching on.
Last year, for instance, the Business Round Table, under the leadership of JP Morgan’s Jamie Dimon, abandoned a long-held view that shareholders’ interests should always come first. Indeed its old mantra, stated explicitly, was that “The paramount duty of management and of boards of directors is to the corporation’s stockholders. The interests of other stakeholders are relevant as a derivative of the duty to stockholders.”
It turns out however that those other stakeholders — consumers and employees — have very different ideas, as do an increasingly large pool of investors who track the sentiments of buyers. Much of the shift to sustainability is actually due to the response of those deplorable derivatives, as they recoil in increasing horror at the consequences of the decision-making by the very businesses that can afford to pay for advice from consultants like McKinsey.
They are taking their revenge in the most direct and painful way possible for your average board member: by shopping elsewhere — either for goods and services, or jobs.
As an example, a study by CGS and reported by eMarketeer found that “Shoppers are increasingly considering sustainability when making purchases, according to research conducted in November 2018, which found that 68 per cent of US internet users deemed product sustainability an important factor in making a purchase.”
Meanwhile, a study by Deloitte found similar attitudes among digital natives when it comes to employment. Writing on a company blog, Ed Gratton, the Communications Manager for Triodos Bank in the UK, and himself a PR executive with a background in sustainability, notes “Millennials want their time to have the same impact as their money and so are nearly three times more likely to seek employment with a company because of its stance on social and/or environmental impact. A resounding 87 per cent of those born between 1990 and 2015 also believe that ‘the success of a business should be measured in terms that go further than its financial results’.”
Indeed the trend has been clear now for some time.
An earlier paper by McKinsey from 2015 revealed that most businesses are ultimately dragged into sustainability by external events.
According to the paper, called Getting the most out of your sustainability program and written by Achim Berg, Nils Schlag, and Martin Stuchtey, of the companies they surveyed, “More than 90 per cent could point to a specific event or risk — such as consumer pressure or soaring commodity prices — that directly triggered their commitment to sustainability.”
Furthermore, they wrote, “More than half cited long-term risks to their businesses: 26 per cent said they wanted to avoid damage to their reputations, 15 per cent were seeking to prevent regulatory problems, and 15 per cent said they wanted to eliminate unnecessary operational risks.”
The reasons were brutally simple. McKinsey identified that the value at stake from risk-related sustainability issues was as high as 70 per cent of earnings before interest, taxes, depreciation, and amortisation.
This recent McKinsey paper, published in November last year, acknowledges that the reason money is now chasing more sustainable harbours is a result of these external pressures.
According to the management consultancy, “[It] has been driven by heightened social, governmental, and consumer attention on the broader impact of corporations, as well as by the investors and executives who realise that a strong ESG proposition can safeguard a company’s long-term success.”