SGE speaker shares how social impact can be good for business
For decades, most arguments for corporate environmental, social, and governance (ESG) reforms have relied on moral appeals. Business leaders often assume that green initiatives and ethical policies inevitably lead to a decrease in net profits. So advocates tend to seek to change hearts, not minds.
New findings in recent years, however, suggest that there is a financial case to be made for ESG excellence.
Total societal impact: a new lens for strategy
As Boston Consulting Group’s (BCG) director of social impact, Doug Beal ’89 (ENG) set out to add to this growing body of evidence and explore the relationship between ethical or sustainable practices and financial returns. In a recent BCG study, Total Societal Impact: A New Lens for Strategy, Beal and his team identified a positive correlation between ESG practices and corporations’ financial well-being in five key industries: consumer packaged goods, biopharmaceuticals, oil and gas, retail and business banking, and technology. Beal presented his research to students as a guest speaker for Leaders in Sustainable Global Enterprise, a weekly speaker series offered by the Center for Sustainable Global Enterprise.
Beal and his team began by defining the critical ESG factors for each industry and interviewed CEOs, board chairmen, CFOs, and other stakeholders about their relationships to each factor. These interviews, as well as vast sets of financial and ESG data, formed the basis for BCG’s research.
The financial case for corporate ESG reforms
The team’s major finding was that the added financial returns afforded to companies that make positive social and environmental impacts are substantial: “In oil and gas, a company in the top quintile [in terms of ESG performance, as measured in the study] has 19 percent premium valuation over the average,” said Beal. In fact, companies with the most positive societal impacts had both higher valuations and higher margins overall.
The types of initiatives that regularly lead to premiums provide insight into why this might be the case. According to Beal, for example, “If you look across the board, the topics that drove valuations were about avoiding negative downsides.” These sorts of changes, be they reforms to limit environmental footprint or to promote employee safety, often decrease liability and help companies appeal to risk-averse or environmentally conscious investors. The importance of mitigating these risks is bigger than the concerns of a handful of investors. “They actually get rated at how well they do this stuff,” explained Beal.
Positive social impact can help a company’s bottom line in a variety of ways. For one, ESG excellence can attract both consumers and talent. It can also reduce costs or help companies to justify asking for higher prices. “Often, it spurs an innovation that you can bring back into your core business,” noted Beal.
Values versus value
The benefits afforded to companies that engage in sustainable and ethical practices are increasingly significant as American corporate culture shifts to emphasize values vs. value. Today, more business leaders are paying more attention to societal impact, making Beal’s work and research all the more important.
“It’s amazing the level of enthusiasm for this topic now,” said Beal. “CEOs today are starting to care about their legacies,” and the next generation of business leaders is already integrating ESG concerns into the way they look at their own career trajectories. “Not only do millennials want to work for a company that Doug Beal ’89 (ENG), director of social impact at BCG, presented findings on the relationship between ethical/sustainable practices and financial returns. positive impact, but they want to be involved in it.”
If the number of companies looking to make strides in ESG performance continues to increase and business leaders are equipped with an understanding of the industry-specific opportunities related to impactful initiatives, we could see major progress over the next few decades.
“It’s a great time in history to be interested in this topic,” noted Beal.