ESG and making a profit?

ESG extracts a cost, but maybe it creates profit in the long run; maybe for a company with a long term horizon, ESG and profit maximisation is the same thing.

Deep dive Cecilia Carlswärd founder of Violet Hill on ESG profitability and long-term thinking

"In the long term," says Martijn Eikelenboom, partner at Arthur D Little,  "I believe all the externalities that you cause as a firm will ultimately be priced into the cost price of a product. So you will have to pay a fair price for CO2, pollution, biodiversity laws and materials that you consume and do not recycle. If you factor those costs in, then the true price of a product will appear, and you realise this and price accordingly, you will maximise profit."

"In the short term, you may get away without playing a favourable ESG strategy, but in the longer term, transparency will increase very significantly, and you will no longer get away with it."

Two other issues fall into the discussion regarding short and long term thinking. First, quarterly accounting is an SEC requirement in the US, but it is closely associated with focusing on the short term. Jeff Bezos says that focusing on the long term is key, that when someone congratulates Amazon on its latest results, he thinks that the drivers of those results were baked in several years before.

So if long-term thinking is right for Amazon and it is right for ESG, doesn't that make it a no-brainer?

Part of the problem here is the pressure of survival. Planning long-term might be fine if you have a balance sheet to support you, but the harsh realities of survival makes short-term focus vital for some companies.

However, investors and regulators are so encumbered with the need to think a few weeks ahead that quarterly accounting doesn't help; thinking long-term requires a cultural shift. Then again, the lesson of Amazon and the words of Jeff Bezos suggests thinking long-term is essential anyway.

The demand for ESG is growing

"In the past," explained Stuart Ravens, ESG analyst, "these things have gone in cycles — there might be interest in ethical business, but then the cycle turns, perhaps with an economic downturn and businesses focused on survival — ethics go out the window. But then, if that were the case, with the 2008 crash, you would have expected interest in ethical business to decline. Stuart says: "Since 2007/08, we haven't seen a decline in the noise and momentum that surrounds the sustainability movement."

He says: "people are demanding that institutions are run more sustainably and that this thinking is "seeping into regulation."

"People know the climate is changing; they understand that extreme weather events are occurring with more frequency — it is especially pronounced on the East Coast of the US, affecting the psyche in that region, and what happens there affects the rest of the world.

"You only need to look at the United Nations Sustainability Goals ", he says; they illustrate how there is pressure on companies to change their approach.

To be more sustainable and focus less on quarterly accounting. And people realise you can be sustainable and profitable at the same time."

Covid has played a role too. The Gordon Gekko idea that greed is good is being replaced with a new way of thinking.

"The momentum has exploded across the globe," says Martijn Eikelenboom, managing partner at consultancy Arthur D Little, "customer perception is changing and changing rapidly."

Then there is social media

A famous anecdote illustrates the importance of social media in driving ESG.  In 2008, Dave Caroll, a musician, flew by United Airlines only to have his guitar seriously damaged en-route. He took to social media, produced songs lamenting his experience, and received compensation thanks to the power of YouTube.

It has become fashionable to focus on the negative side of social media, its echo chambers and its polarising effect. But social media has also shone a spotlight on a companies shortcomings and helped empower the customer.

The demand for ESG is there, investors want it, the public demand it, regulators are beginning to take up the cause, which creates a danger for companies that are slow to adapt both now and in the future as transparency increases.

The ESG opportunity

There is a flip side to the risk, and that is opportunity. First mover advantage is a key reason to adopt ESG. As Martijn Eikelenboom explains, it is partly about creating an ecosystem — companies without sustainable ESG foundations will struggle to be considered in the coming years.

Deep dive, Martijn Eikelenboom, Cecilia Carlswärd and Stuart Ravens on long term thinking and ESG

ESG as a solution to the labour shortage

The labour shortage is not a temporary phenomenon. Covid may have created one-off effects, but the retirement of the baby boomers ensures the labour shortage will endure.

Companies with a solid ESG foundation are able to play a vital role in attracting talent:

• To attract staff keen to work for organisations that reflect their values
• Keeping those staff, developing a culture of inclusion and learning

Damien Stork of CHX says: Businesses don't know what it means to put the human at the centre of a business. It is also about trusting people, but this takes us back to feelings. We don't think trusted, we feel trusted, these are feelings, not thinkings."

"And if people feel good, they will perform well."

"When you think about ESG, it is critical that organisations start with their social environment and impact. We need to engage people to continue to work, to want them to work and be well enough to work. We simply don't have enough people of working age who are well and want to confine working to supply the growth plans we have. "

Deep dive; Damien Stork on putting people at the centre and why this matters  

Articles in this series:

What is ESG why do need it?
ESG and corporate culture
What is Warren Buffett right to call ESG asinine and what did he mean?

ESG, what, why and how;  Martijn Eikelenboom, Cecilia Carlswärd, Stuart Ravens and Damien Stork on the elevator pitch and tips on implementing ESG