Investments in ESG boost revenue and EBITDA growth

11 May 2023 4 min. read
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Companies which take environmental, social and governance policies most seriously enjoy enhanced results, according to a new study. Firms with the best gender diversity on their boards doubled their growth rate, while firms with better sustainability credentials had a 3% greater EBIDTA margin.

“Our findings provide much-needed perspective in the debate as to whether ESG activities correlate with financial performance,” said Axel Seemann, advisory partner at Bain & Company. “This new data shows that positive ESG outcomes are a trait of successful companies. This should encourage private companies and investors to confidently double down on ESG efforts. We only expect this correlation to strengthen as ESG data becomes richer and more nuanced.”

Bain undertook the research in partnership with EcoVadis, assessing how ESG activities and outcomes have impacted 100,000 companies. The research examined how various aspects of ESG activities revealed in EcoVadis scorecards — including implementing practices to reduce carbon and improve DEI, embedding sustainability into management processes and procuring sustainably—correlate with both ESG outcomes and financial performance.

Investments in ESG boost revenue and EBITDA growth

The study found that companies which scored highest on the S component of ESG had higher executive team representation for women on average. The firms which excelled in this regard also tended to have better financial results. According to the study, companies that rank in the top 25% of their industry for executive team gender diversity had annual revenue growth of 4%, compared to the worst performers, whose growth was just 2%. Their EBITDA profit margins were also beefed up by the practice – with the leaders sitting at 12%, and the laggards on just 9%.

ESG leaders also had higher employee satisfaction, something which is proving increasingly important in the global economy. Firms with higher staff satisfaction tend to have lower rates of attrition – with staff focused on growing their careers within the firm, and therefore improving the firm. Bain found that, in line with this, firms with higher employee satisfaction had three-year revenue growth as much as 5% higher than those with less-satisfied staff.

Factors which helped to improve employee satisfaction ranged well beyond the basics of fair pay and ensuring a safe work environment, too. Top benefits may include career training, mental and physical healthcare, childcare, and educational opportunities, all of which boost employee satisfaction and, as a result, productivity and retention. These findings emphasize the opportunities for private companies to improve their ESG efforts, which currently lag those of public companies. Only 35% of large private companies achieve top scores for carbon management in their supply chain, compared to 53% of large public companies, the research found.

Investments in ESG boost revenue and EBITDA growth

As pressure mounts on firms to do more on sustainability and climate change, it is also becoming more apparent how early movers on environmental policies are feeling the benefits. Laggards on supply chain sustainability typically enjoyed EBITDA margins of 11% between 2019 and 2021. In the same period, leaders enjoyed a 14% margin.

Of the firms to score highest for EcoVadis ratings on carbon management, 53% of public companies are in the highest bracket, compared to just 35% of large private companies. This presents an opportunity for private equity investors, looking to quickly add value to their properties. This will likely be buoyed by another statistic pointed to by the researchers – some 93% of limited partners surveyed by Adams Street previously said that investment returns are enhanced by incorporating ESG factors into their decision making.

“These findings should motivate companies at all levels of ESG maturity to redouble their investment in accelerating their sustainability journey,” commented Sylvain Guyoton, Chief Rating Offering at EcoVadis. “For companies in nascent stages, this means developing sustainability management systems with policies, action plans and reporting. Companies at mature stages can pursue more advanced capabilities such as regenerative resource management and product circularity. Ultimately, cascading these practices into their value chains can support, for example, Scope 3 decarbonization and circularity initiatives, and also puts those trading partners on the same path to value creation. Our research shows this hard work will be well worth it.”