Perspective: Responsible business and the connection to making money
How do you argue the case for a business to be more responsible or sustainable? The main reason is that it is the right thing to do. It is the right thing to do to manage the operations considering environmental, social and governance (ESG) issues because a business is part of a society and depends on it and vice verse. This is however not enough for some who also wants to see the business case. With other words, why should a business invest in running its operations in a responsible way of it does not give returns to its shareholders.
A study from 2015 can give you good hints. The study “From Stockholder to the Stakeholder – How Sustainability Can Drive Financial Outperformance” (March 2015, Oxford University/Arabesque Partners) shows that responsible businesses performs financially better than non-responsible businesses. The study does not show why there is this connection. It could be that responsible businesses are better managed overall, but the study indicates a strong correlation between profit and responsibility.
The study looks at the results of 200 studies of the area. The main results of the report are:
- 90% of the cost of capital studies show that sound ESG standards lower the cost of capital.
- 88% of the studies show that solid ESG practices result in better operational performance.
- 80% of the studies show that stock price performance is positively influenced by good sustainability practices.
Fortunately, the study also points out that “Corporate managers should realize that the critical
condition for translating superior ESG quality into competitive advantage is that sustainability has to be deeply rooted in the organization’s culture and values”.
So, if doing the right thing is not good enough for a business, there are also good financial reasons to focus on the environment, social and governance of a corporation.