Due to increasing social and regulatory pressure during the last decade, the merits of incorporating sustainability into the business model have been reevaluated. As it turned out, embracing Corporate Responsibility not only has moral values, but also other significant benefits.
- Funding
With a view to becoming Carbon-neutral by 2050, the European Union and member states have launched various initiatives to support green solutions. The European Green Deal declared at least €1 trillion of sustainable investments over the next few decades. Green and social start-ups should contact their local authorities to receive information on such funds.
In terms of equity, disregarding environmental, social and governance (ESG) standards also have a negative effect on the company’s value. As required by the Principle for Responsible Investment, many funds and financial institutions are already integrating ESG into their company evaluation models. As a result, firms with poor performance will receive a higher risk premium and lower terminal value. In practice, that means sustainable companies are more likely to find investors.
Sustainability also plays a role in debt financing. Similar to the equity side, banks also take ESG into account when evaluating the risk level of a credit. Companies with high ESG rating, therefore, will find it easier to take a loan and the conditions are also likely to be better.
- Risk management
Credit institutes prefer sustainable businesses not only for reputational reasons, but also from a risk management perspective. Climate action failures, extreme weather and biodiversity loss have been repeatedly identified by the World Economic Forum as the most alarming risk in the next decade. Therefore, firms that have a system in place to properly evaluate, adapt and overcome such risks are considered more resilient and have better future prospects.
The most obvious indicator in this aspect is reputational risks. In the era of global connection and social media, companies are finding it increasingly difficult to cover misconducts. Bad reputation can affect the revenue through lower sales, thus reducing the profit margin and cash-flow. It can also directly increase the liquidity risk as funding or credits may be withdrawn.
Another increasingly prominent threat is legal and regulatory risk. As mentioned above, European countries are already introducing regulations on business activities, with other global leaders following suits. Some concrete measures include the EU’s carbon pricing, Germany’s Supply Chain Due Diligence Act, and France’s Anti-Waste law. But pressures are coming from non-governmental groups as well. Climate litigation, i.e. the use of lawsuits as a weapon against harmful business practice has become a global trend. The most prominent cases in the last two years include Greenpeace vs. Shell and a joint complaint against Uniqlo, Inditex Skechers and co. in France.
- Recruitment and enhanced employee performance
The relation between an employee’s sense of purpose and their engagement has long been observed. In face of the social transition towards more social responsibility, this phenomenon has only become more prominent. A large proportion of Generation Z considered business’ impact on society among key factors when choosing an employer. Weak ESG integration in the company directly reduces productivity through strikes, absenteeism or high turnover rates, as reported by McKinsey. A high turnover rate is problematic since it results in loss of know-how, bad employer branding and high recruitment costs.
That sustainable businesses have better financial performance has been proven time and time again in academic research. Yet lack of perception of a business case is still among the most prominent barriers to embrace ESG. The arguments in this article are only a few practical reasons in favor of a sustainable business model. What factors are we missing in your opinion? Leave us a comment below!