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by GK Strategy 5th July, 2017

CSR was so 90s. It’s time for ESG.

While 90s fashion may have made its way back to the mainstream, Corporate Social Responsibility (CSR) has not stood the test of time. Since the 1960s, companies have used CSR as a means of delivering social value, which in turn was supposed to improve their financial results by building customer loyalty to their brand. However, as the practice has spread and consumer awareness has increased, cynicism is widespread and new terms such as “green-washing” have entered the lexicon.

Recent research has shown that 40% of US consumers think companies undertake CSR solely to boost their brand and that the key aspect they value is “authenticity”. Which is where ESG comes in.

Environmental, Social, and Governance (ESG) involves the systematic application of environmental, social and governance disciplines within a business. It is not about creating PR opportunities but a substantive approach to how the business is run and the values that govern it. It is this approach that investors are turning to in order to assess the health of an asset prior to investing – a company run with ESG at its heart is a less risky proposition as it is by nature less likely to be involved in a scandal that might affect its value or revenue post investment. However, it’s not just the absence of risk that drives ESG.

Businesses with strong governance practices are likely to outperform those with poor standards – they will build customer loyalty better, retain staff better, and have better long term growth. A 2012 study by Deutsche Bank found that “high ESG ratings correlated with a lower cost of capital in 100% of the studies; with market-based out-performance in 89%; and with accounting-based out-performance in 85%”. Those numbers are staggering, which is why ESG is only set to grow.

The changing priorities of consumers, particularly the much discussed ‘millennial’ generation, are also driving this. Research has found that a third of millennials see sustainability as a key factor when choosing a job and 84% are interested in sustainability in investments. Given this, both the investment community and corporates themselves are now placing ESG as part of their core strategy, rather than the inconvenient add on that CSR was. It’s now a board priority rather than something bundled off to the communications team.

Potential businesses can be examined on their ESG practices before acquisition and then monitored during the lifespan of the relationship to ensure value creation. There are various ways in which a business with strong ESG credentials can create value: gaining competitive advantage in their market; recruitment and retention of well-trained, motivated employees; increased brand reputation and consumer loyalty (leading to retained and new contracts with consumers).

In a world where cynicism reigns and the gulf between the consumer and corporations grows larger, ESG is a welcome commitment to embed sustainability and effective governance at the heart of organisations’ propositions.

And, if the customer, board and environment can all win, then long may it continue.

To find out more about GK’s ESG practice please contact megan@gkstrategy.com

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