Some businesses are just learning how to manage their environmental, social, and corporate governance (ESG) risks, while others are light-years ahead, creating a competitive gap that seems to grow more significant by the day. Companies that have well-defined ESG programs are using them strategically to lower costs, get ahead of impending regulations, create long-term value, and attract new customers and investors. But how do companies that are just getting started catch up to peers and gain the knowledge they need to improve their own ESG performance?
Having a serious and thoughtful approach to ESG means companies should not only look within to reinforce their ESG performance, but also look outwards at what their competition is doing. Studying market trends and competitive movements is a common practice in business, so why not incorporate this into your ESG strategy?
First, a corporate value system must be established that places an emphasis on ESG and corporate responsibility. Once this foundation is laid, it is time to identify sustainability objectives and investigate how to meet these targets. However, only looking for ESG solutions internally may prevent companies from seeing opportunities that lie in plain sight.
ESG benchmarking solutions enable companies to understand ESG gaps they have compared to competitors, by taking an in-depth look at their peers’ policies, procedures, and processes. With this information, companies can identify their own shortcomings and learn how to become ESG leaders themselves.
Advantages of Focusing on Your ESG Performance
Companies are beginning to understand that how they manage ESG issues influences how they are perceived in the marketplace. Customers are educating themselves on a company’s business practices before making a purchase, and investors are increasingly considering ESG factors when deciding where to invest. It is imperative that companies continue to re-evaluate their sustainability programs and policies, because improving them can yield significant advantages.
Impact on Financial Performance
Focusing on ESG improvements is not simply window dressing. There is a clear link between ESG success and financial performance, value creation, and long-term stability. Keeping a close watch on your material ESG risks can also insulate your company from any potential controversy. Without a strong ESG plan, a business’s reputation could suffer, and it may become more difficult to operate in an increasingly demanding marketplace. Accessing capital may also become more challenging.
Data suggests that companies with better ESG ratings, on average, experience lower costs of capital compared to companies with poor ratings. Also, companies that improved their ESG scores have experienced reduced cost of capital. Positive ESG performance has been associated with about a 10% lower cost of capital, which can be credited to lower regulatory, environmental, and legal risks.1
Furthermore, companies with positive ESG Risk Ratings can leverage their results to support capital raising activities, such as issuing sustainable finance instruments like green, social, sustainability, and transition bonds. A good ESG rating can provide access to favorable rates on sustainability-linked bonds or loans, which are tied to sustainability targets, but the proceeds can be used for general corporate purposes.
Reduction of Operational Costs
Addressing ESG issues has also been known to reduce operational costs, with companies actively combating waste and improving efficiency. For example, 3M has reportedly saved US$2.2 billion since introducing its “Pollution Prevention Pays” 3Ps program in 1975. The program places an emphasis on reformulating products, improving the manufacturing process, redesigning equipment, and recycling and reusing waste from production.2
Since 2008, Unilever has cut costs by US$1.5 billion through sustainable sourcing, the practice of integrating environmental and ethical standards into the supply chain procurement process. Impending environmental risks to the supply chain has motivated companies to demand more transparency and eco-friendly practices from their suppliers. Executives at Unilever agree that investments in sustainability now often result in long-term cost savings.3
Addressing Regulatory Risks
Companies are coming under more regulatory pressures as the world moves toward meeting not only environmental targets like net-zero, but also social targets. Many countries in the EU are taking a closer look at human rights abuses, calling for stronger regulations on reporting and transparency within a company’s supply chain.
In February 2022, the European Commission proposed a law on corporate sustainability obligations. The European Due Diligence Act requires that companies ensure their entire supply chain is adhering to human rights standards as well as environmental protection rules. Once this regulation is in place, companies will have two years to comply, which could have far-reaching effects.4 Staying ahead of the curve when it comes to ESG planning and strategy, and understanding how peers are tackling regulatory challenges, could mean a smoother transition to regulatory adherence.
In March 2022, the U.S. Securities and Exchange Commission (SEC) proposed new rules expanding climate-related, and ESG disclosure requirements for public companies registered with the SEC. The proposal calls for increased reporting when it comes to greenhouse gas (GHG) emissions across the company’s activities, as far down as its supply chain.5 With an increased interest in ESG from the investor community, the call for standardized ESG reporting is unlikely to go away. It is more important than ever for companies to take their ESG performance and climate impact transparency more seriously.
Benchmark Performance With Sustainalytics
As companies realize the benefits of addressing ESG risks, they are confronted with several tough questions: Are we doing all we can to be sustainable? How do we properly manage our ESG risks? How do our ESG efforts stack up against the rest of the industry?
“Peer benchmarking is really about our clients becoming better companies,” says Simone Altoe, manager of ESG Performance Analytics at Sustainalytics. “So, they can have greater insights to better inform their decision making and apply what they have learned to ESG activities that are more beneficial.”
Peer benchmarking services allow companies to understand what drives efficiency and reduces sustainability risks. Benchmarking can compare your company’s actions with the actions of your competitors and articulate the differences. It can help create a culture of ESG and sustainability practices throughout your organization and direct future management and resource allocation decisions. The potential is endless.
Find out Where Your Gaps Lie at Sustainalytics.com
In order to demonstrate the power of peer benchmarking, Sustainalytics has developed its innovative ESG Comparison Tool. This tool allows you to instantly compare your company’s ESG performance versus three industry peers and get a high-level view of where your gaps might lie. At the touch of a button, you can compare ESG Risk Ratings, Exposure Levels, ESG Risk Management, Top Material ESG Issues and Controversy Ratings. This information is just the tip of the iceberg with Sustainalytics. Try it out today!
To learn more about Sustainalytics’ Peer Performance Insights, click here.
References
5 Martinez, J. 2022. “ESG Disclosures: SEC Proposed Rules an Opportunity.” Hart Energy. August 23, 2022. https://www.hartenergy.com/exclusives/esg-disclosures-sec-proposed-rules-opportunity-201758.
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