Why Companies Focused on ESG Perform Better

Robust corporate climate action can boost financial gains, according to a report EY released yesterday. Nearly 70 percent of companies surveyed saw higher than expected financial gains from their ESG (environmental, social and governance) initiatives, and companies that incorporated financial metrics, employee wellbeing and customer benefits in holistic ESG programs saw increased environmental gains as well. 

The EY report also delivered stark news for global emissions reduction plans. While 93 percent of companies surveyed have made public climate change commitments, the overwhelming majority of those companies fall short of targets that align with the Paris Agreement and will limit global warming to 1.5 degrees Celsius. To meet the goals of the Paris Agreement, global emissions must peak immediately and fall 45 percent by 2030. However, out of the 506 companies surveyed, only 42 percent have committed to reducing their emissions by 45 percent, and only 35 percent of the companies committed to those reductions have set a timeline of completion by 2030. Only 11 percent of responding companies have committed to a net-zero plan.

Why climate leaders are more successful 

While small, incremental plans to address environmental concerns may seem more manageable for companies new to climate action, the report found that companies that take fewer climate actions struggle more in implementation than companies that take more robust approaches. Based on the breadth and depth of responding companies' climate work to date, the report divided the corporations into three groups: pacesetters, explorers and observers. Companies in the pacesetters group, the group reporting the highest number of sustainability actions, were 2.4 times more likely than companies within the “observers” group to report significantly higher financial value than expected from climate initiatives. Additionally, companies in the observers group struggled the most to implement climate initiatives, even though they took the fewest and simplest actions. 

While financial gains are an important factor for businesses when considering sustainability programs, the majority of companies surveyed found that their sustainability plans also helped their organization capture social value, too. Robust sustainability programs help organizations recruit and retain employees and create positive brand perception and purchasing behavior with clients and customers. 

Overcoming barriers to ESG and sustainability success

As certain barriers threaten to slow the pace of corporate climate initiatives, companies risk being accused of greenwashing when their climate actions do not align with public commitments. 

Internal barriers to addressing climate change are more common than external barriers, and 62 percent of survey participants reported disagreements amongst board members and management when evaluating initiatives. Additionally, 61 percent reported that progress is impeded by the sheer number of groups involved in developing climate initiatives. 

A smaller percentage of companies reported facing specific external barriers to implementing climate programs. Some of the most commonly cited external barriers included concerns that climate actions would reduce their company’s ability to compete in the short-term, lack of data and technology to reduce and offset emissions, and difficulty securing financing for climate projects. However, to address these hurdles, over half of the companies in the pacesetters group created strategic partnerships to overcome barriers to implementation and collaboratively address climate change, compared with only 6 percent in the observers group. Partnerships included agreements with direct competitors, governments, academic institutions, suppliers and non-profit organizations. 

The report concludes that companies must also invest more in their employees that contribute to sustainability and ESG plans. Thirty-five percent of survey respondents said that retaining and training talent was reported as a top barrier to activating their climate goals, and 31 percent said that the lack of climate expertise at their board and management levels created impediments to accomplishing more ambitious climate goals. To meet sustainability and climate commitments, companies need to invest in employee education and training to build sustainability proficiency and capacity across operations.

All companies must boost their climate ambitions

While pacesetting companies are leading their corporate peers in climate actions, even the best-performing organizations must increase their climate ambitions in order to make the emissions reductions necessary to limit planetary warming to 1.5 degrees Celsius. Commitments must be accompanied by measurable, well-managed and accountable action plans. Reducing emissions is complex work, but the companies that are investing in the talent and mechanisms to implement climate plans and accurately track progress are already seeing financial, environmental and social gains.

Image credit: Wance Paleri via Unsplash