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Unpacking the Financial Benefits of ESG for Businesses Around the World

Environmental, social and governance (ESG) management may be a relatively new concept in some regions, but there are financial benefits to unlock no matter where a business exists and operates. Sedex’s Walter Lin looks at how the payoffs from good ESG performance can manifest – alongside tips on articulating these benefits with regional business partners to help win their support for sustainability goals.

This article was written for the European Chamber of Commerce in China, and first appeared in the May/June issue of their EURObiz magazine.

ESG: Corporate sustainability by another name

ESG is a high-priority focus area for business, particularly in the US and Europe, with drivers including investor interest, consumer expectations and new legislation aiming to promote sustainable business practices. As the conversation around ESG matures, debate and complexity are increasing – especially in the US, where ESG has become a political battleground,[1]

The constant evolution presents significant challenges for companies, both for those already incorporating ESG requirements into their activities and those less familiar with the concept. The latter includes many businesses across Asia, where ESG is a less mature yet fast-developing field.[2]

How can companies navigate these challenges, particularly with business partners in Asia?

What helps is to understand corporate ESG from a broader sustainability perspective, and recognise that existing initiatives mean many businesses already work towards improving their ESG performance in some way – whether they use the term “ESG” or not. Examples include corporate social responsibility programmes, green supply chain initiatives, employee physical and mental wellbeing, and efforts to reduce emissions.

More importantly, any business – no matter their size, industry, or location – can benefit from good ESG and more sustainable practices.

With supply chain partners’ support more important than ever, partly thanks to new laws[3] requiring companies to report on supply chain sustainability due diligence, collaboration is essential to achieving ESG goals.

Articulating the ‘win-win’ opportunities with business partners and suppliers in China and across the Asia-Pacific region is a powerful way to engage them and secure their support.

The financial benefits of ESG across global regions

Unlock investment opportunities and long-term, sustainable growth.

Many investors seek to fund sustainable growth by investing in companies that can demonstrate commitment and progress in ESG areas. This interest is expanding beyond listed businesses and into private investment.[4]

Studies and stock-market analysis also indicate that good ESG management supports companies’ long-term success, including financial performance,[5] stakeholder trust and a retained “social license” to operate.[6]

Win new customers and secure preferential terms

Large companies in key markets (US, Europe) seek business partners and suppliers that will support them with their ESG goals. Companies in major supply industries and regions can be more attractive to new customers through clearly showing their ESG credentials.

As international buying companies encourage their business partners to improve in ESG areas, some are developing financial incentives for suppliers – such as finance programmes linked to sustainability performance.[7]

Avoid damaging fines by complying with legislation

Sustainability-related and governance-related laws around the world come with potential fines for companies that don’t comply with them.

For example, over 40 countries have anti-corruption laws, most of which include fines as penalties,[8] while China is just one of several countries where businesses can be fined for contributing to environmental pollution or ecological damage.[9]

Drive operational efficiencies and avoid ESG risk-related costs

Improved ESG in different areas supports cost savings and other efficiencies. For example, reducing carbon emissions or using water more efficiently in production processes can save on utility costs.

Better health and safety for employees reduces injury-related costs and absences, while improvements in other social areas can support positive employer-employee relationships, helping to reduce staff turnover. ESG initiatives also come with opportunities to explore new technologies – perhaps in partnership with customers or suppliers – to discover other efficiencies and competitive advantages.

Good performance across sustainability areas also helps companies to avoid potential costs associated with ESG risks – such as disrupted or unstable production, reputational damage and sanctions under legislation.

Tap into market growth and talent opportunities

Studies continue to show consumer support for, spending shifts towards, and growing markets for more sustainable products.[10] Providing these products, or their components, allows a business to tap into these opportunities.

Demonstrating strong ESG commitments can also help a business to attract and keep top talent, as signs indicate that employees are increasingly keen to work for companies with ESG goals backed by robust sustainability programmes.[11]

The ripple effect: additional business benefits of ESG

Alongside these financial benefits, efforts to improve ESG performance link to many other positives:

  • Supporting supplier improvement, for more robust businesses and supply chains.
  • Supporting healthy, stable communities by providing decent work for local people and minimising harm to local areas.
  • Building a strong reputation among consumers, customers and other key stakeholders through demonstrable commitment to sustainability.
  • Complying with other legislation and reporting requirements – for example, data captured across different ESG areas may also be needed for financial reporting, gender pay gap reporting, and general operational analysis to identify areas for improvement.

Companies of all sizes will already hold valuable information relating to ESG areas – such as information on employee gender, reported accidents and injuries, and management practices. A central data ecosystem for ESG data, including information on a company themselves and on their suppliers, supports businesses with all their sustainability-related requirements.

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What next? Progressing ESG goals with regional business partners

Use these tips to have productive conversations about ESG with business partners and stakeholders around the world.

  • Increase their awareness and understanding of ESG, starting from the beginning where this is a new concept for your business partners. Translate the concept into a message that your business partners will understand – such as different terms for sustainability-related activities – and highlight the common points.
  • Connect ESG topics and requirements with what your business partners already do in their daily work, such as human resource management or health and safety measures.
  • Work collaboratively – paint the “big picture”, share your vision, and share your company’s plans for ESG programmes or commitments. What is your company going to do? What does this mean for your suppliers and other business partners?
  • Emphasise the shared benefits in making progress together. Make it clear that you understand the important role your business partners play in enabling your company to reach their ESG goals.
  • Provide support for the business partners who need it. Can you provide training, or share your own best practice – for example, to help your suppliers calculate their own carbon emissions? Can you connect business partners that can help each other, so they can share what they already do well or invest in sustainable solutions together?

By emphasising the shared benefits, building joint initiatives, and enabling regional business partners to improve, your company can create powerful support for your own and wider ESG goals

Need help? Our Consulting team provide tailored support on ESG, meeting legislation, and developing supply chain sustainability programmes.

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[1] For example, see Reuters, “Business fights back as Republican state lawmakers push anti-ESG agenda”

[2] For example, see Asian Investor, “Asia still has a way to go compared to Europe and the US when it comes to ESG adoption”  and Goldman Sachs, “A new era for ESG in Asia Pacific”

[3] Such as the recently passed anti-slavery bill in Canada, and the EU’s upcoming Corporate Sustainability Due Diligence Directive

[4] Source: Financial Times, “The ESG world is turning more to private investments”

[5] For example, see EY, “How can slowing climate change accelerate your financial performance?”

[6] For example, see section ‘Sustainable performance is not possible without social license’ in McKinsey, “Does ESG really matter – and why?”

[7] For example, see drinks business Britvic and fashion company PVH

[8] Source: CMS Guide to Anti-Bribery and Corruption Laws 2021

[9] Source: Chambers and Partners Environmental Law 2022 – China

[10] For example, see McKinsey and NielsenIQ, “Consumers care about sustainability – and back it up with their wallets”

[11] For example, see the European Investment Bank’s most recent Climate Survey from March 2023