Unpacking McKinsey: Five ways that ESG creates value
Unpacking McKinsey: Five ways that ESG creates value
Written by: Paula Antalffy | 3-4 minute read
No business exists within a vacuum - they all are intertwined within the environment and community in which they operate. In a recent thought leadership paper by McKinsey they unpack five significant ways in which ESG can drive value for your company. Their alignment on using employee engagement to achieve ESG goals is huge validation in our approach at MyDay, and we unpack the key themes from their paper (Five ways that ESG creates value) here.
As a refresher for those less familiar, the ESG framework, while loosely defined, takes into account 3 key areas in the table below:
This focus in the McKinsey article is on how applying a conscious focus on the right ESG metrics can help businesses create value. The analysts also illustrate why it’s so important for businesses to take a proactive approach to ESG reporting, highlighting key areas that taking the framework into account will help businesses.
These include:
Increasing investor focus on sustainability: Investors today are looking to focus on ESG metrics more precisely, looking for businesses who demonstrate an innovative spirit when it comes to tackling sustainability.
ESG scores boosting profitability: Stats show that businesses with higher ESG metrics see a key reduction in downside risk and higher equity returns.
The Link Between ESG and Value Creation
While it is easy to understand the statistic which links ESG to increased profitability, linking value creation directly to ESG scores can be a bit more tricky.
However, McKinsey’s article on the topic breaks ESG value creation and it’s direct link to cashflow into 5 key drivers:
facilitating top-line growth,
reducing costs,
minimising regulatory and legal interventions
increasing employee productivity
optimising investment and capital expenditures
We unpack each of these in turn:
1. Top-line growth
Creating an environment of transparency and trust, through monitoring and bring visibility to key ESG KPIs, can help companies tap into new and existing markets. Building trust with customers, governing bodies, investors and stakeholders can also help aid access to new opportunities as they appear.
ESG scores have also been shown to drive customer preference. A study conducted by McKinsey in 2019, found that “upward of 70 percent of consumers surveyed on purchases in multiple industries, including the automotive, building, electronics, and packaging categories, said they would pay an additional 5 percent for a green product if it met the same performance standards as a non green alternative.”
The customers of the future, especially millennials and Gen Z, are shown to be environmentally conscious consumers. Therefore investing in sustainable and green policies will enable businesses to secure future growth.
2. Cost reductions
ESG can reduce costs significantly by helping combat rising operating expenses, such as raw material and water costs, which can impact operating profits by up to 60%.
McKinsey has found a strong correlation between resource efficiency and financial performance, with companies that take their sustainability strategies the furthest achieving the greatest success. Examples include 3M's "pollution prevention pays" program, which saved the company $2.2 billion since 1975, and a major water utility that achieved cost savings of almost $180 million per year through lean initiatives.
While in the short term, choosing to become more sustainable can have upfront costs, businesses need to look at these as long term investment into future savings.
3. Reduced regulatory and legal interventions
Having a strong ESG external-value proposition can provide companies with greater strategic freedom and ease regulatory pressure. McKinsey's research shows that strength in ESG can reduce a company's risk of adverse government action.
One-third of corporate profits are typically at risk from state intervention, with regulation's impact varying by industry. For pharmaceuticals and healthcare, the profits at stake are around 25 to 30 percent, while in banking, the value at stake is typically up to 50 or even 60 percent.
4. Increased Employee Productivity
Studies have shown that a strong ESG proposition can have a positive impact on employees leading to increased productivity, motivation and job satisfaction. What’s more these metrics have been directly shown to have higher stock returns.
Employees who perceive their workplace to be making a positive impact on the world, also tend to be more productive and motivated to perform better.
On the other hand, weak ESG policies have been short to negatively impact productivity through strikes, worker slowdowns, and other labour actions within organisations.
5. Securing Future Investment
A strong ESG proposition can enhance investment returns by allocating capital to sustainable opportunities and avoiding stranded investments, which may not pay off due to long term environmental issues.
Unfortunately, the ‘do-nothing’ approach has been shown to erode profits. That is why it’s important for all businesses to establish a proper baseline for ESG goals.
Regulatory responses to emissions and bans on certain products will introduce new constraints, but repurposing assets and leaning into sustainability can present new opportunities.
Implementing ESG Frameworks: In Practice
The personal dynamic is an essential aspect for leaders seeking new ESG opportunities or trying to drive an organisation in new directions. While it's vital to understand the multiple ways that environmental, social, and governmental factors can create value, leaders must articulate their priority initiatives clearly, with McKinsey suggesting a limitation of no more than 5.
The CEO should rally support around the initiatives that best map to the company's mission. To get everyone on board, leaders should also link their ESG priorities to value creation and show how hard metrics feed into the business model.
Leaders should also assess the value at stake from external engagement and plan scenarios for potential hits to operating profits. However, businesses are ready to take on short term costs as in the long-term, investing in policies in line with sustainability and ESG can help boost profit.
Putting ESG at the Forefront of Your Business: The Easy Way
For businesses looking to invest in sustainability, people centric policies, and help secure long term growth, understanding how to drive real change through your employee base can be a challenge. However, like with any modern problem, new and innovative businesses, such as the MyDay platform, can make the transition to activating ESG straight forward.
The MyDay platform offers a unique blend of employee, environmental and community building benefits which empowers team members to get behind sustainability initiatives whilst putting their well-being first.
The platform’s features can be broken down into four key areas:
Employee engagement tools: personalised tools for wellbeing, recognition and community, guided by science and proven to impact both outlook and motivation.
Verified global impact: Directly unlocked by participation in these wellbeing and community activities, a roster of verifiable global impact projects and high integrity carbon credits which are handpicked by your employees.
Company wide support groups: employee groups, which allow team members to connect around key life moments and global causes relevant to them. These help build a sense of community within your teams, and team morale and business performance in the process.
Measurable KPIs: key data points which can easily be viewed by investors, employees and the global community showing the direct impact of your businesses on a global community, as well as stories emerging from within the organisation.
You can learn more about the MyDay app and how it can help businesses with value creation by booking a call with us today.
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