How can ESG help you save costs?

February 15, 2024

Example H2

Introduction

It is often misinterpreted that investment in ESG will make companies prioritise profits less than what they used to. Harvard Business Review in one of its articles titled “You Can Reduce Costs And Still Achieve ESG Goals“ mentions that Investment in ESG programs sometimes runs out of steam after the easiest-to-implement and highest-ROI actions have already been put into action, leaving the more challenging long-term actions ahead. It doesn’t have to be this way”. Businesses now understand that sustainable supply chain practices can lead to a structural cost advantage and/or increased business revenue. ESG has proven to be margin-accretive over a period of time and leaders need to broaden the timelines when it comes to ESG and cost reduction.

In this piece, ESG’s impact on cost reduction as well as overall financial performance is interesting to note.

1. Cost savings from operations

Efforts to reduce water or energy consumption will have an immediate impact on a business' bottom line. PepsiCo, for example, treated and recycled water from its Frito-Lay potato chip and snack making process. The FMCG giant saved over $20 million a year on utilities and other expenses. McKinsey states that ESG strategies can positively affect operating profits by as much as 60%.

2. Compliance costs from regulations

ESG performance (or lack thereof) can have a direct impact on regulatory compliance, and the financial consequences of non-compliance can be severe. Fines and penalties cost, on average, $2 million. Business disruption, lost productivity, revenue loss, and reputation damage impact profits. The true cost of non-compliance is estimated at over $14 million.

3. Prices from stocks

Researchers from Kellogg and Harvard Business School found that stock value tended to rise after positive ESG news about a company emerged. In particular, news about safety, consumer privacy, improving labour practices, and lowering environmental footprints were linked to a bump in stock prices.

4. Creditworthiness

ESG factors can affect a company’s risk ratings when it comes to things like purchasing workers’ compensation or commercial property insurance. From the insurance company’s perspective, the reasons for this are fairly obvious. Companies with a strong track record of safety performance (the ‘S’ in ‘ESG’) have less risk of an accident, and therefore are less likely to make a claim. Because of this, companies with strong ESG performance may benefit from lower insurance premiums.

5. Competitive advantage

Today’s consumers have overwhelmingly indicated a preference for more socially and environmentally responsible goods. This is evident from the fact that two-thirds of consumers say they would rather buy from sustainable brands, according to a study by IBM and the National Retail Federation. What’s more, they’re willing to pay a premium for sustainability: Of these environmentally-conscious shoppers, nearly 7 out of 10 said they would shell out up to 35% more for eco-friendly products.

Saint-Gobain, for example, has invested €13.6 million, equivalent to $16.4 million, to reduce the environmental footprint of its flat-glass manufacturing plant in India and make it more water efficient. The company built two reservoirs to store up to 130 million litres of rainwater. Those investments help keep the plant running and save money.

Electric-equipment maker Schneider Electric, No.17 on the WSJ ranking, last year issued a convertible bond—which can be swapped into equity—linked to its ESG objectives. The company will have to pay investors extra if it fails to meet specific targets, such as having at least 30% of women on its leadership teams by 2025.

Flipside of ignoring ESG

Businesses that fail to consider such metrics can experience a significant financial impact. MSCI Inc., a global provider of financial and portfolio analysis tools, conducted a four-year study on this issue. The study found that companies with high ESG scores experienced lower costs of capital, lower equity costs, and lower debt costs compared to companies with poor ESG scores.

RoIe of Environmental Sustainability Performance

HP generated $3.5 billion of commercial sales in 2021 from "new sales in which sustainability criteria were a known consideration and were supported actively by HP’s Sustainability and Compliance organization

Sustainable sourcing efficiency improvements helped Unilever realize over €1.2 billion in operational cost savings since 2008

Company-wide improvement in profit margins resulting in $50M for Nike by replacing certain shoe components with more sustainable materials and improving its supply chain sustainability practices

In cost savings of $2.2M by healthcare company Medtronic from 80+ energy efficiency projects completed in 2021 that reduce the company's energy usage and Scope 1 and 2 GHG emissions

From the above statements and examples, we can infer that embedding ESG practices will bear financial fruits in the long run, benefit the company from risks and regulatory pressure. It is the mindset shift that the company stakeholder needs to have from business as usual to purposeful business in order to reap value from sustainable investing practices.

At Oren, our mission is to help companies become sustainable, profitably. Speak to our sustainability experts today to learn how you can save costs as you implement your sustainability strategy.