Financial Incentives for Corporate ESG Initiatives
ELLA MEYER
US ESG as an asset class has seen tremendous growth in assets under management. From 2018 to 2021, funds have increased 14x, from $5 billion to nearly $70 billion. This tremendous rise in ESG reflects the increasing public demand for more capital allocation towards sustainable initiatives, social impact policies, and responsible government practices. College students, particularly Millennials and Generation Z, are currently one of the main groups experiencing the consequences of this rise - for example, diversity programs open particularly for women, underrepresented minorities, the LGBTQ+ community, veterans, and first generation college students have sprung up within modern job recruitment; entry-level positions are taking heed to the younger generations’ concerns, offering more tailored benefits such as flexible work from home policies and mental health days; and corporate programming is changing to recognize the notion that 46% of Generation Z and 55% of Millennials claim ESG is the most important value they have in the workplace. As ESG continues to expand, the question rises as to how this benefits the businesses and corporations that are tasked with promoting them. By expanding on how leveraging ESG may tap into market growth, avoid fines and risks, and retain positive brand recognition, this paper sheds light on the financial incentives of corporate ESG initiatives.
First, the corporate adoption of ESG allows companies to tap into market growth and talent opportunities. A recent joint study from Mckinsey and NielsenIQ examining sales growth for ESG-related products found, on average, at least 60% of respondents said they’d prefer products with sustainable packaging or relates to their aspirations of a sustainable lifestyle. This response explains the disproportionate growth incurred by ESG-related products, which has increased 1.7 percentage points higher than non-ESG related products with a 4.7% CAGR from 2018 to 2022. As consumers shift to buy more sustainable products, particularly in the sectors of packaged foods, canned beverages, household items, and personal care products, companies can capitalize on this shift and switch their production methods to produce more sustainably-based goods. In turn, more top line growth, possible synergies directly related to ESG, and even new partnerships with sustainable supply chains or partners will be generated from this transition.
Second, adopting ESG initiatives help companies avoid unwanted risks and legal fees. For example, China has established fines as penalties for contributing to environmental pollution or ecological damage. These fines have deterred many companies that operate in China to be more aware of their environmental impacts and other ESG-related risks to avoid unwanted costs. Yet, some institutions have disregarded these risks; for instance, in September, Deutsche Bank-controlled investment firm DWS announced it would pay $25 million to settle charges over misstatements regarding its ESG investigating and failures in policies to prevent money laundering. This example reflects a larger picture of many ESG initiatives that miss the legitimate implementation not only in corporate, but in financial institutions as well. In order to stay within the law, companies will consider to abide by their local ESG laws in order to save costs.
Third, corporations are incentivized to adopt ESG to maintain a positive public image. Externally, identifying with more progressive policies allows companies to maintain a “good look” to their shareholders and stay in-line with the competition as competitors similarly adopt the same mentality. Today, it’s not so much who is adopting the best and most innovative ESG policies - it’s who’s not. According to another study conducted by McKinsey, this concept is labeled as a “social license” to operate. Without this social license, companies risk losing buy-in - and therefore dollars - from shareholders concerned with ESG, loss of stake and productivity from internal employees if they do not feel recognized, and decrease in community engagement, which also hurts earnings. Therefore, it is in companies best interest to obtain this “social license” in order to maintain trust internally and externally - whether it’s a hoax or not.
Looking forward, the future of ESG initiatives is complicated. Since Texas passed an anti-ESG investing bill in 2021, the public has seen states take different stances on the topic, especially considering the recent SB 17 relating to DE&I initiatives in public education. Although DE&I is slightly different from ESG, and higher education is starkly different from a corporate machine like Goldman Sachs, the transformative wave of younger generations’ concern regarding the future of society’s planet, community, and government will place greater pressure on the corporate boardrooms to consider the financial stake they have in the movement.