ESG spending is key to boosting business resilience

10 June 2024 7 min. read
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Amid rising costs and pressures on bottom-lines, the corporate world has been steadily rowing back on environmental, societal and governance spending over the last year. Arguing that this makes firms less resilient in the face of many other issues, however, Xynteo Director Ellie Besley-Gould explains how purpose-driven strategy can actually be the engine of business growth.

The last 12 months have been marked by a quiet roll-back of ESG ambition in response to economic challenges for many businesses. But this short-termism will prevent long-term resilience and growth. More than ever, we need to find a realistic, achievable, and credible path forward that can deliver ‘good growth’. This starts with making ESG central to, not in addition to, the business plan.

At the outset, ESG constitutes a challenge to how we have historically approached doing business by introducing the expectation that corporate accountability extends far beyond financial returns and shareholder interests. In today’s business environment, organisations are expected to be accountable for environmental stewardship to protect our natural world, social responsibility to uplift communities, and governance transparency to instil trust.

ESG spending is key to boosting business resilience

You might be a tyre manufacturer; that’s what you’ve always done and you’re good at it. But now you need to think about not just where to buy the cheapest rubber so you can make a profit – but ensure that it is sustainably sourced. When the product reaches end-of-life, you’re also responsible for ensuring there is a way for the end customer to recycle the product. This means you, the tyre seller, are now being asked to take a holistic worldview of the interconnected nature of both the challenges and opportunities we face on a global scale in today's world—and be dependent on the systems in place to support you to deliver that obligation. It sounds big, scary and challenging – and it should, because it is!

A lot of great ESG work gets stuck in the nature of the strategy and plans that take them forward – they’re add-ons, optional extras. “We have a diversity strategy”, “we have an energy carbon reduction strategy”, “we have an annual ESG report”. They are additional to commercial strategy, not tied into the core. For us to overcome this disconnectedness, ESG must be integrated into the very core of commercial strategy – only then will it have the attention required to meet the impact challenge while also building commercial value and resilience.

Incremental change

If we are going to hit the targets many businesses have set around sustainability and environment at the point we hope to hit them, the way we run those organisations will need to look completely different in 20 years’ time.

Moving to a net-zero energy profile isn’t something most organisations can do overnight, or without investment – but it also doesn’t have to be done overnight. Delivering transformation is something that can, and more than likely will, be done over the next decade or two.

A great example of this generational thinking is Orsted, the Danish renewable energy giant. Founded in 1972 to manage gas and oil resources in the Danish sector of the North Sea, the business made a conscious decision after COP (in Copenhagen) in 2009 to shift from being a company with 85% of fossil fuel-based activities to a company that is 85% based on green energy activities – and achieved it.

In this example, the sustainability strategy was integrated into the core of the business so goals can be met. Outputs are delivered across several generations of CEOs, new market positions achieved, and commercial resilience delivered. If you look back at four of the five CEOs before your current one, their world is probably strikingly different from today—and it will be again for the fourth or fifth CEO in the future. Only with ESG integrated into core strategy can you develop the pathways you need, and critically, implement them effectively and financially.

Attracting stakeholders

In an era where consumer preferences and investor sentiments are increasingly shaped by ethical and environmental considerations, ESG excellence has become a powerful differentiator. Socially conscious consumers are actively seeking out brands that align with their values, driving market competitiveness for companies that prioritise sustainability. Similarly, impact-driven investors are channelling their capital towards organisations that demonstrate a genuine commitment to ESG principles, recognising the long-term value creation potential of responsible business practices. But we have not yet seen the great mainstream transformation to sustainably led purchasing. We have yet to crack the way to drive en masse purpose-driven commercial success. Getting this right remains a commercial advantage still to be taken.

By integrating ESG into commercial strategies, companies can effectively tap into these growing markets, solidifying their brand equity, attracting top talent, and fostering enduring relationships with stakeholders who share their vision for a sustainable future.

Improved bottom line

Adopting true circular business models offers substantial commercial benefits by transforming waste into valuable resources, driving both sustainability and profitability. Effective ESG integration goes beyond mere compliance or risk mitigation; it presents a profound opportunity to create shared value for all stakeholders. By aligning their operations with environmental stewardship, social responsibility, and ethical governance, companies can forge lasting partnerships with communities, suppliers, and customers, fostering trust and nurturing a collaborative ecosystem which can also build-in resilience of supply and compliance with existing and incoming regulation.

Take, for instance, the case of Dutch company Philips, which has pioneered a circular lighting service. Instead of selling light bulbs, Philips retains ownership and leases light as a service. This model ensures that materials are reclaimed and reused at the end of their life-cycle, significantly reducing raw material costs. By creating a closed-loop system, Philips not only cuts down on waste but also stabilises material supply, reduces production costs, and generates a steady revenue stream through leasing. This circular approach enhances their bottom line by lowering operational expenses and opening new market opportunities, demonstrating that sustainability and profitability can go hand in hand.

Benefits of proactive climate action

As the urgency of addressing climate change and environmental degradation intensifies, businesses have a unique opportunity to position themselves as leaders in the transition towards a sustainable future. By integrating climate action and sustainability into their operations, companies can not only drive positive environmental impact but also unlock new avenues for economic growth and profitability.

Truly integrating ESG into core strategy can yield significant cost saving and competitive advantages. By aligning their sustainability efforts with commercial objectives, businesses can effectively future-proof their operations and mitigate risks associated with resource scarcity, regulatory changes, and shifting consumer preferences.

Ultimately, the alignment of ESG with commercial objectives represents a win-win scenario for businesses, society, and the environment. By recognising the inextricable link between purposeful practice and economic prosperity, companies can pave the way for a future where responsible business is not just a noble aspiration but a fundamental driver of growth, resilience, and long-term success.

Ellie Besley-Gould is a director at Xynteo, a global organisational consulting firm, specialising in helping large organisations improve their environmental and social impact.