In the modern business world, sustainability is more than a fad; it is a crucial pillar for successful entrepreneurship. ESG drives sustainability and value creation.
In this expert contribution, we discover how a strong ESG policy not only leads to a higher valuation of your company, but is also synonymous with entrepreneurial excellence.
ESG in a nutshell
First, let's discuss the foundation. ESG represents the pillars of environment (enviroment), society (social) and good governance (government). Factors such as energy consumption, climate impact, resource availability, health, safety and effective governance play a central role. These factors are not only increasingly important to stakeholders, but are also influenced by increasing laws and regulations.
Why a strong ESG policy creates value
A sound ESG policy has an impact at several levels. In terms of cash flows, company-specific risks and market-specific risks, a strong ESG policy changes the dynamics of value creation.
1. Cash flows and competitive advantage
Companies with robust ESG policies have significant advantages. They can experience growing demand for sustainable products and services, enjoy cost savings through efficient energy and resource use, and attract high-quality staff. These businesses are known for their innovativeness, long-term planning and attraction to top talent. And that results in higher profits and more stable cash flows.
2. Management of company-specific risks
A strong ESG policy goes hand in hand with improved risk management. Results in fewer failures and incidents within business processes. Ensures a reduced risk of fraud and corruption. And creates a strengthened position for investors and financiers. A lower business risk profile attracts capital and improves financing conditions. And that, in turn, is useful in obtaining funds.
3. Market-specific resilience
Businesses with low market-specific risk can raise capital at more favorable rates, resulting in higher valuations. Reduced reliance on fossil fuels, for example, can minimize the impact of price volatility, which in turn attracts investors and financiers.
ESG and value creation: the driving forces
The core message is clear: a strong ESG policy contributes to cash flow growth, risk reduction and attractiveness to financiers and investors. Growth of these cash flows leads to value creation, fueled by two crucial elements: business growth and return enhancement on invested capital. McKinsey has conducted extensive research and identified five developments that are driven by good ESG policies:
- Revenue growth through sustainable products and services: An active ESG policy opens doors to revenue growth through the offer of more sustainable products and the ability to perform services based on ESG principles. For example, as an infrastructure company with a safety rating of 3 or higher on the safety ladder, you can work for large energy companies.
- Efficiency with energy and water conservation: Energy- and water-saving production techniques result in significant cost savings. This contributes to improved profitability.
- Fewer restrictions from laws and regulations: A strong ESG policy results in fewer restrictions from increasingly stringent laws and regulations. This reduces legal risks and promotes operational flexibility.
- Attract and retain quality staff: A strong ESG policy facilitates the attraction and retention of high-quality staff. Engaged, satisfied and motivated employees increase productivity.
- Sustainable investments and long-term returns: Sustainable investments not only pay off better financially, but also for a longer period of time. They contribute to long-term value.
Although not all developments contribute equally to all businesses, the fact is that every organization will be affected by these factors in one way or another. As a result, every organization can profit from a thoughtful ESG policy.
Reporting and forward-looking entrepreneurship
It is important to realize that ESG policy is not optional. Reporting on ESG policy has become mandatory for more and more businesses. Although this obligation does not yet apply to SMEs, it is essential to start an active ESG policy now. The investment will pay for itself in the long run, often sooner than expected. Moreover, by doing so, you contribute to a better, cleaner and future-proof world.
