Getting a return on enterprise investment in ESG compliance

If we can measure an ROI for the efforts going into ESG compliance – then ESG can be a revenue and profit driver for enterprises.

A lot of effort is going in – but where is the return and how might we measure it? A lack of standardised, believable measurement means that investments in ESG are not being appreciated by consumers and other stakeholders – holding back change. ESG compliance should be a profit driver for enterprises. This can be addressed.

ESG compliance can be a profit driver

This article is for enterprises rather than investors. Enterprises are the suppliers, the factories, the farms, the corporate buyers, the retailers, and the multi-national companies that work in the real economy. They design, order, make, package and sell the goods and services that we all consume every day.

These enterprises are investing heavily in ESG – whether they are the household names that we all know, or the factories, farms, and fields upstream in the supply chains, typically in emerging markets.

But generating a return on the ESG investment that they are making is difficult. ESG compliance can be profit driver. This article explains why this is difficult and then how to get that return established.

ESG: what is it?

ESG stands for “Environmental, Social and Governance”.

It is a large part of the corporate social responsibility framework upon which corporates, shareholders, regulators, politicians, and customers are increasingly focused. Amongst other things, ESG standards are associated with achieving “net zero”, avoiding forced labour in supply chains, treating suppliers and employees equally and fairly, consuming resources carefully and ideally achieving a circular usage of resources from sourcing through to the end of life. These are also not a set of principles. Enterprises are expending significant efforts to live these principles in everything that they do – all the way from the customer in the shop back through to the picker in the field and the machinist in the factory.

Find out more about ESG and what it is here.

Investment in ESG compliance

Developing and then applying ESG standards in business has a significant cost. None of this is for free – but how do we, the consumer, understand how to value these efforts – and are we ready to pay more?

Large enterprises are taking ESG seriously. ESG professionals, even with limited experience, are now in high demand as new departments are being set up or existing teams are being beefed up. ESG has moved through the top ten issues in the CEO’s in-tray all the way to the top three.

Here are three interesting statistics from a recent PwC survey on ESG:

Source: PwC 2021 Consumer Intelligence Series survey on ESG (link here).

We have also detected an important change in the discussions as well:

• ESG used to be largely about risk management: how do we manage our PR around ESG? How do we minimise the risk of bad press involving us or our suppliers?
• Increasingly the focus is moving from managing ESG risks to making a measurable difference – improving ESG compliance across the enterprise and its supply chains, improving the lives of workers and measurably reducing the impact of business on the planet.

Investments in ESG and ESG policy are both moving from a negative bias to a positive bias. And ESG compliance can be a profit driver for enterprises.

This is great news, but this trend will not continue unless enterprises can measure a return on the investments that they make.

It is a communication problem

The issue we all face in ESG is that there is too much data and not all of it is useful.

Talking to suppliers reveals some of the complexity. One supplier we work with is facing over 200 separate standards that are being applied to his factory alone – many overlapping and some even conflicting. On top of that, most workplaces face multiple overlapping audit processes – a continual treadmill of surveillance as large enterprises use their ESG investment budgets to build vast auditing machines in order to police their wider operations.

And of course, when all this information comes through to the investor or the consumer, it is confusing and hard to believe. Much of it is self-policed, self-referenced and not comparable from one company to another. And, of course, the non-credit rating world is doing its best to develop some kind of benchmarking based on public data and public statements, but this is fiendishly time-consuming and difficult to do – and can only be done periodically – maybe once per year with significant latency.

All of this means that there is a general perception that the ESG world is full of “greenwashing” and inaccurate claims. As a general matter, enterprises are trying hard to do the right thing and we don’t yet have a better system. But that’s not the point. We are losing the communication battle with the public. There are just too many standards, too much discussion, too much talk, too much wiggle room, too many ESG reports and supplements – and not enough concrete, comparable measurement based upon verified actionable third party data without latency. It all needs to get “real-time”.

Fairtrade, organic and free-range

Here are three ESG-friendly labels that do work. There are lessons for all of us here. Consumers understand what these labels mean – and are generally prepared to pay extra for products that carry them (if they care and if they can) or they purchase cheaper goods without these labels for economic reasons or because they do not feel it is important. Whichever way we look at it – these are ESG labels that do work and do generate a return for enterprises that implement them. As Fairtrade report on their UK website: “77% of consumers have actively chosen a Fairtrade product over a non-Fairtrade product in their shopping [supported by] .. a growing trend towards eco and ethical shopping, particularly in younger generations.”

And the Fairtrade brand does not even speak to the quality of the product – only the treatment of the suppliers and the workers who made it.

If consumers have better information, and pay more for products with better ESG credentials, we can measure a return on the compliance investment delivering this result.

These are “standards”. And the use of believable standards means that a return on investment can be measured in the P&L – the only place, ultimately, that really matters. But surely more standards are not the answer – see the comments above. And that is right as well – it is not about more standards – but taking the standards that we already have and making them work for consumers in the shop and online.

The answer: measure it, manage it, improve it

We need better measures of ESG performance that are real-time and which can be translated all the way through to the consumer in the shop or online – and which consumers can then trust.

We see this market developing quickly.

• In the “E” of ESG, there are many initiatives underway that can tell us, convincingly, about the sustainability of materials and production processes, the carbon footprint of transport, and the recycling potential of products at end of life – for example, the Higg Index in fashion. These are going to take time to arrive, as each industry, if not each product, has a unique footprint. It is happening but we need to be patient.
• For “S” and “G”, the solution is here already.
  • Our worker voice app is used in workplaces (factories, fields and farms) by workers to report continuously, in real-time, anonymously and share-ably on their conditions, pay, freedoms, health and safety.
  • We generate a social score on a workplace – like a “Trustpilot” or a “Yelp” but on a workplace based upon the workers, not the customers. It is a simple idea, although hard to execute.
  • And social scores can be passed all the way through to consumers in the shops and online.
  • And this transforms communication with consumers about the products that they buy, covering 7 out of the 17 UN sustainable development goals in real-time. It is 3rd party, actionable data – which consumers can use to decide how much to pay for products.

For more information on our worker voice app and how it works, click here.

Measure it, manage it, improve it – and communicate it

Here is the key to generating a return on ESG investments across the enterprise. Communicate what you are doing directly to your consumers in shops and online at product-level – and they will decide what they think and whether they are prepared to pay a premium for goods that have better ESG credentials.

And this will translate enterprise investment in ESG directly into the P&L, into net and gross margins – and turn ESG from a cost into an investment that actually generates a measurable return. And this can be done right now.

A version of this article was originally published in ctmfile here, a leading authority on corporate treasury and cash management matters and part of  Strategic Treasurer. The version here on our website includes additional comment and some amendments.