Is ESG overly and dangerously woke?

This week I want to touch on a subject many companies may be asking themselves right now: is ESG overly and dangerously woke? As the anti-woke movement gains strength and has had a real negative financial impact on companies (some recent examples here and here), management teams may want to protect their companies from the backlash  of “being woke”. But is ESG in fact just a fad or a superficial gesture to appease the “woke” crowd? Or is it, as we believe, more a strategic and value-creating approach to business that addresses important societal challenges?

Having an ESG strategy is a rational and responsible way of doing business that creates value for both the company and society. ESG can in fact enhance the competitive advantage, reduce the costs and risks, and create new opportunities and growth for companies. You can call it what you want if your board thinks ESG is a contaminated term right now (then call it sustainability, or responsible investing if so), but in the end the idea behind ESG is that you can optimize on more than one (financial) front at the same time. Why? Here are 6 reasons (and their link to your P&L).

1. It can improve customer loyalty (and thus your pricing capabilities). According to this survey by McKinsey, 70 percent of consumers said they would pay a premium for products from companies with a positive social or environmental impact. As an example, Unilever reported that its brands with a strong social or environmental purpose grew 69 percent faster than the rest of its portfolio in 2020.
2. It can reduce your costs and supply chain risks. Companies that have a robust ESG strategy can save money by reducing their energy consumption, waste generation, water usage, and carbon emissions. For example, look at how much companies like FedEx or UPS have saved from transforming their fleet to electric vehicles. Or just imagine how an industrial facility with renewable energy supply can be more resilient if it operates in a region where electricity supply is insufficient (or very expensive).
3. Companies that ignore sustainability issues can also face significant financial consequences from fines, lawsuits, boycotts, protests, or scandals. For example, Volkswagen had to pay more than $30 billion in penalties and settlements after it was exposed for cheating on emissions tests in 2015.
4. Companies can also avoid legal troubles by adhering to high standards of ethics, transparency, accountability, and human rights. This is usually strengthened when focusing on getting your corporate governance structure right.
5. You can discover new sources of revenue and profit by solving social or environmental problems or creating positive social or environmental impacts. For example, Tesla, a US electric vehicle company, has become one of the most valuable companies in the world by offering products that reduce greenhouse gas emissions and appeal to environmentally conscious customers.
6. It can help with employee attraction and retention. And this is not only easier for your HR department, but also good for returns. This paper by Alex Edman (LBS) shows that companies that made Fortune’s “100 Best Companies to Work For” list generated higher stock returns than their peers.

So, to us ESG is not woke. Being too “woke” in the eyes of critics can mean pandering to an elitist liberal point of view with feel-good statements and the like. Clearly companies need to be very careful to be properly inclusive, not just inclusive to a liberal elite, but to all stakeholders and customers. By contrast, ESG, when properly managed has proven to be a rational and responsible way of doing business that creates value for both the company and society. ESG is not about politics or ideology. It is not even only about doing good. It is not about making statements to carry favor with certain stakeholders. It is about managing risks and seizing opportunities. It is about aligning the interests of shareholders with those of all legitimate stakeholders. It is about creating long-term value for all.

I hope you found this interesting. As usual, if there is anything we can help you with, or if there is an ESG topic you would like to know more about, please let us know.

Best,

Marimar

CEO, Miranda ESG