ESG has come under attack from a variety of sources for a host of reasons. Yet corporate leaders overwhelmingly remain committed to their environmental, social, and governance (ESG) initiatives. Perhaps best stated by Coca-Cola CEO James Quincey, “If ESG becomes toxic as a phrase, which it basically has in the U.S., it doesn’t matter to me. I’m just going to stop saying ‘ESG.’ But the idea that for my basic product, I want to be water positive, I want to have a circular economy on my packaging, and I want to grow our business with less sugar – you can call it anything you like, but no one with common sense says those are bad ideas.” Leaders are staying the course because sustainability initiatives create value.  

Investment in sustainability isn’t just about protecting value. It should be expected to increase shareholder value, or at least positively impact the drivers of shareholder value, such as improved margins or reduced cost of capital. The ability to measure and track sustainability practices is key to quantifying the value and monetizing the benefits of sustainability investments. Companies can prioritize investments that influence the drivers that contribute the most to shareholder value.

Top- and bottom-line growth

Revenue growth accelerates when products and services align to customer values. Customers become more loyal, increasing willingness to pay and reducing churn. Market share is protected against competitors by meeting the sustainability demands of customers. Similarly, companies catering to the needs of their customers can gain a first mover advantage. For example, a supplier may be competing with its peers to provide a sustainable packaging solution to a large manufacturer. If that supplier can create the sustainable solution first, it may have a first mover advantage and disrupt its peers out of that value chain. 

Sustainability initiatives provide numerous avenues for operating margin expansion. Labor becomes more efficient in a growth-with-purpose culture, with greater employee productivity, satisfaction, and retention. Cost savings can also be realized from lower hiring and onboarding costs, as it is also easier to attract world-class talent when your values align with those of prospective employees.

Production efficiencies result from reduced waste and usage of natural resources. While tracking electricity, water, and waste data has not been “the normal course of business” like tracking sales, customers, and labor cost, it is not dissimilar from the insights that can be obtained from analyzing financial data. When you gain a better understanding of your energy use across your portfolio of assets, you can home in on locations that incur the highest costs and consider energy efficiencies or redirecting activity to lower cost areas. Similarly, when analyzing revenue by customer, you want to allocate your best performing sales team to target those customers that have potential to spend more. An often-overlooked sustainability benefit is earned media from positive coverage of sustainability initiatives, which in turn can lower customer acquisition cost.

When you’re able to monetize the benefits of sustainability practices and link them to revenue and cost drivers, ultimately improving profit margins, sustainability investments increase shareholder value.

Value protection and value creation

Understanding the impact of climate risk on not only physical infrastructure but also your supply chain is an imperative to protecting value. Mitigating those risks can help reduce insurance costs and prevent stranded assets, thereby avoiding write-offs, devaluations, or conversion to liabilities that negatively impact shareholder value.

Making investments in decarbonized assets or more sustainable fuel types can increase your return on investment. For example, investors are underwriting at least 10 to 25 basis points lower in capitalization rates for buildings that have sustainability-focused investments. Research indicates a capitalization rate spread potential of as high as 200 basis points between green and non-green buildings, creating value for investors. Why? Because green buildings use less energy, emit less carbon dioxide, and use less water – measures that will protect the building from legislative fines and obsolescence.

Sustainable financing driving shareholder value

Companies are now being evaluated on their ESG ratings in addition to credit and debt ratings. Having strong sustainability practices can increase your ESG rating, opening doors to purpose-driven investors and access to more efficient capital, such as sustainability-linked loans at better than market rates.

Tax credits, incentives, and tax-advantaged financing are long-standing benefits that can be leveraged to offset sustainability investments, which can significantly improve cash flows. Investments in renewable energy, energy efficiency measures, and zero emissions transportation often qualify for tax credits and incentives.

As emitting carbon becomes an increasing risk to society on a global scale, over 40 countries and 20 cities have implemented a carbon tax or emissions trading system since 2019. The number continues to rise. Additionally, the cost of carbon credits continues to rise year over year. It’s yet to be seen whether the voluntary carbon market can overcome the recent scrutiny and reputational issues; however, high-quality and verifiable carbon removal projects can leverage carbon credits as a financing mechanism. As stated in BloombergNEF’s Long-Term Carbon Offsets Outlook 2024 report “there is no shortage of governments and investors that are eager to monetize emissions reductions through carbon credits and channel financing towards projects.” 

More than just a compliance exercise

The perception remains that ESG imposes a financial burden hampering value creation; or more charitably, an exercise in compliance. In fact, sustainability initiatives have the potential to drive tangible shareholder value via a variety of mechanisms across a wide domain. By tracking and measuring the right data, monetizing the benefits, and linking them to the drivers of shareholder value, sustainability practices and investments lead value creation.