Three Powerful Levers of ESG
Sustainable Growth’s Impact On Profitability
The Impactful Executive: Weekly Brief Article
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Three Powerful Levers of ESG: Sustainable Growth’s Impact On Profitability
Leading with Purpose: The New CEO Metric in a Socially Conscious World
A McKinsey analysis delves into the nature of achieving consistent growth. Growth isn’t just about revenue growth or profitability, but also sustainability and ESG priorities.
"Revenue growth is good. Profitable growth is better. Profitable growth that advances ESG priorities is best."
The analysis, covering 2,000+ public companies, examined financial performance, Total Shareholder Return (TSR), and ESG ratings. Findings suggest that those who integrate ESG priorities into their growth strategies align with ethical practices AND financially outperform their peers.
These "triple outperformers" delivered TSR rates two percentage points higher than companies solely focused on financial metrics.
"Not only can you do well while doing good—you can do better."
However, companies excelling in ESG alone while lagging in growth and profit found themselves underperforming their peers by five percentage points in TSR.
From 2017 to 2021, only one in four companies achieved more than 10% revenue growth annually. Over half of the triple outperformers surpassed this by a 1.4 per cent higher median revenue growth rate.
Practical examples of incorporating ESG into core strategies include:
A metals and mining company - To support the energy transition, they divested from coal and embraced green materials, simultaneously promoting sustainability and accelerating growth.
A European transport and logistics provider - They created an innovation hub to help clients reduce their carbon footprints. This led them to annual revenue growth of 20% above their competitors.
Three further vital factors of these outperformers were identified.
Mergers and Acquisitions (M&A) - Integrating ESG criteria into their acquisition decisions, organisations rapidly tapped into profitable ESG growth areas, e.g., By acquiring ESG-focused brands, a cosmetics company saw a 39 percentage point surge in ESG ratings and a 25% annual rise in shareholder returns above its industry benchmark.
Transparent reporting and proactive communication - Clearly and regularly showcasing ESG metrics and related progress to the investor community, e.g., A European software firm created an interactive dashboard to track its ESG achievements in real-time publicly.
Embedding strategic priorities into the organization - A global shipping company institutionalized its strategy by forming dedicated committees and tying remuneration to ESG targets. This amplified revenue growth and also prepared them for upcoming regulatory shifts.
Organizations must invest in sustainable and inclusive growth that seamlessly merges revenue, economic profit, and shareholder returns.
So What:
How can I incorporate ESG and sustainability into our company practices to drive sustained growth and profitability?
Source:
Doherty, R., Kampel, C., Koivuniemi, A., Pérez, L., & Rehm, W. (2023, August 09). The triple play: Growth, profit, and sustainability. [Web article]. McKinsey & Company. (Link)
