Unpacking the Financial Benefits of ESG For businesses around the world

ESG management may be a relatively new concept in some regions, but there are financial benefits to be unlocked no matter where a business exists and operates. In this article, Walter Lin of Sedex looks at some of the ways that the payoffs from good ESG performance can manifest, and offers tips on articulating these benefits with regional business partners to help win their support for sustainability goals.

ESG: Corporate sustainability by another name

ESG continues to be a high-priority focus area for business, particularly in the United States (US) and Europe, with drivers including investor interest, consumer expectations and new legislation aiming to promote sustainable business practices. However, as the conversation around ESG matures, debate and complexity are increasing – especially in the US, where ESG has become a political battleground,[1]

This ongoing evolution presents significant challenges for business, both for those already incorporating ESG and those less familiar with the concept. The latter includes many businesses across Asia, where ESG is a less mature yet fast-developing field.[2]

How can companies navigate these challenges, particularly with business partners in Asia?

It helps to understand corporate ESG from a broader sustainability perspective, and recognise that existing initiatives mean many businesses already work towards improving their ESG performance in some way—whether they use the term ‘ESG’ or not. Examples include corporate social responsibility programmes, green supply chain initiatives, employee physical and mental wellbeing, and emissions reduction efforts.

More importantly, any business—no matter their size, industry, or location—can benefit from good ESG and more sustainable practices.

With supply chain partners’ support more important than ever, thanks in part to new lawsin several jurisdictions requiring companies to report on sustainability due diligence activities in their supply chains,[3] collaboration is essential to achieving ESG goals.

Articulating the ‘win-win’ opportunities with business partners and suppliers in China and across the Asia-Pacific region is a powerful way to engage them and secure their support.

The financial benefits of ESG across global regions

Unlock investment opportunities and long-term, sustainable growth

Many investors seek to fund sustainable growth by investing in companies that can demonstrate commitment and progress on ESG areas. This interest is expanding beyond listed businesses and into private investment.[4]

Studies and stock-market analysis also indicate that good ESG supports companies’ long-term success, including financial performance,[5] stakeholder trust and a retained ‘social licence’ to operate.[6]

Win new customers and secure preferential terms

Large companies in key markets (US, Europe) seek business partners and suppliers that will support them with their ESG goals. Companies in major supply industries and regions can be more attractive to new customers through showing clear ESG credentials.

As international buying companies encourage their business partners to improve in ESG areas, some are developing financial incentives for suppliers – such as finance programmes linked to sustainability performance.[7]

Avoid damaging fines by complying with legislation

Sustainability- and governance-related laws around the world come with potential fines for companies that don’t comply with them. For example, over 40 countries have anti-corruption laws, most of which include fines as penalties,[8] while China is just one of several countries where businesses can be fined for contributing to environmental pollution or ecological damage.[9]

Drive operational efficiencies and avoid ESG-risk-related costs

Improved ESG in different areas supports cost savings and other efficiencies. For example, reducing carbon emissions or using water more efficiently in production processes can save on resource costs.

Better health and safety for employees reduces injury-related costs and absences, while improvements in other social areas can support positive employer-employee relationships, helping to reduce staff turnover. ESG initiatives also come with opportunities to explore new technologies—perhaps in partnership with customers or suppliers—to discover other efficiencies and competitive advantages.

Good performance across sustainability areas also helps companies to avoid potential costs associated with ESG risks – such as disrupted or unstable production, reputational damage and sanctions under legislation.

Tap into market growth and talent opportunities

Studies continue to show consumer support for, spending shifts towards and market opportunities for more sustainable products.[10] Providing these products, or their components, allows a business to tap into these market opportunities.

Demonstrating strong ESG commitments can also help a business to attract and keep top talent, as signs indicate that employees are increasingly keen to work for companies with ESG goals backed by robust sustainability programmes.[11]

The ripple effect: additional business benefits of ESG

Alongside these financial benefits, efforts to improve ESG performance link to lots of other positives:

  • Supporting supplier improvement for more robust businesses and supply chains.
  • Supporting healthy, stable communities by providing decent work for local people and minimising harm to local areas.
  • Building a strong reputation among consumers, customers and other key stakeholders through evident commitment to sustainability.
  • Complying with other legislation and reporting requirements – for example, data captured across different ESG areas may also be needed for financial reporting, gender pay-gap reporting and general operational analysis to identify areas for improvement and greater efficiency.

Companies of all sizes will already hold valuable information relating to ESG areas – such as information on employee gender, reported accidents and injuries, and management practices. A central data ecosystem for ESG data, including information on a company themselves and on their suppliers, supports businesses with all their sustainability-related requirements.   

What next? Progressing ESG goals with China-based business partners

Use the following tips to have productive conversations about ESG with business partners and stakeholders in China:

  • Increase awareness and understanding of ESG, starting from the beginning where it is a new concept for your business partners. Convert the concept into a message that your business partners will understand—such as using different terms for sustainability-related activities—and highlight the commonalities.
  • Connect ESG topics and requirements with what your business partners already do in their daily work, such as human resource management or health and safety measures.
  • Work collaboratively – paint the ‘big picture’, share your vision and your company’s plans for ESG programmes or commitments. What is your company going to do; what does this mean for suppliers and other business partners?
  • Emphasise the shared benefits in making progress together, making it clear that you understand how your business partners play an important role in enabling your company to reach its ESG goals.
  • Provide support for the business partners who need it. Can you provide training, or share your own best practice; for example, to help your suppliers calculate their own carbon emissions? Consider ways to connect business partners that can help each other, by sharing best practice on what they already do well or investing in sustainable solutions together.

By emphasising the shared benefits, building joint initiatives and enabling regional business partners to make improvements, your company can create powerful support for your own and wider ESG goals. 

Walter Lin is managing director for Asia at Sedex, a leading technology company providing data, insights, tools and services to empower sustainable supply chains globally. Their platform and solutions, which include the SMETA audit, are designed to support businesses to manage and improve their ESG performance and meet their supply chain sustainability goals. The company has six offices globally, including in Shanghai and London, and works with many globally recognised brands such as Reckitt, Mengniu Dairy, Nestlé, Molson Coors, and Barclays. Their network comprises nearly 75,000 businesses around the world, with thousands in China

[1] For example, see Ross Kerber, Business fights back as Republican state lawmakers push anti-ESG agenda, Reuters, 24th April 2023, viewed 18th May 2023, <https://www.reuters.com/business/sustainable-business/business-fights-back-republican-state-lawmakers-push-anti-esg-agenda-2023-04-22/>

[2] For example, see “Asia still has a way to go compared to Europe and the US when it comes to ESG adoption” – HSBC Asset Management’s Jacqueline Pang, Asian Investor, 16th November 2022, viewed 18th May 2023, <https://www.asianinvestor.net/article/asia-still-has-a-way-to-go-compared-to-europe-and-the-us-when-it-comes-to-esg-ad/482094>; and A new era for ESG in Asia Pacific, Goldman Sachs, 28th February 2022, viewed 18th May 2023, <https://www.goldmansachs.com/intelligence/pages/gs-research/gs-sustain-our-analysis-of-apac-esg-regulation/report-new-era.pdf>

[3] Such as the recently passed anti-slavery bill in Canada, and the EU’s upcoming Corporate Sustainability Due Diligence Directive 

[4] Patrick Temple-West, The ESG world is turning more to private investments, Financial Times, 6th May 2023, viewed 18 May 2023, <https://www.ft.com/content/907cfec1-6d9d-45b6-89e0-18bd878ea5c3>

[5] For example, see Steve Varley, How can slowing climate change accelerate your financial performance?, EY, 2nd November 2022, viewed 18th May 2023, <https://www.ey.com/en_gl/sustainability/how-can-slowing-climate-change-accelerate-your-financial-performance>

[6] For example, see section ‘Sustainable performance is not possible without social license’ in Does ESG really matter – and why?, McKinsey, 10th August 2022, viewed 18th May 2022, <https://www.mckinsey.com/capabilities/sustainability/our-insights/does-esg-really-matter-and-why>

[7] For example, see drinks business Britvic and fashion company PVH

[8] Source: Guide to Anti-Bribery and Corruption Laws, CMS, 2021, viewed 18 May 2023, <https://cms.law/en/media/international/files/publications/guides/cms-guide-to-anti-bribery-and-corruption-laws-2021?v=6>

[9] Source: Environmental Law 2022 – China, Chambers and Partners, 21st October 2022, viewed 18 May 2023, <https://practiceguides.chambers.com/practice-guides/environmental-law-2022/china/trends-and-developments>

[10] For example, see Consumers care about sustainability – and back it up with their wallets, McKinsey and NielsenIQ 6th February 2023, viewed 18th May 2023, <https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/consumers-care-about-sustainability-and-back-it-up-with-their-wallets>

[11] For example, see the European Investment Bank’s most recent Climate Survey, March 2023