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You have likely noticed the green boom in business of late. From the aisles of supermarkets to the proclamations of major corporations, things are getting leafy and verdant.

In 2020, Nestlé’s chief marketing officer said that sustainability was “a trend that will intensify as companies seek to meet evolving consumer expectations on sustainability.” He was not wrong.

Companies nowadays are keen to tout their sustainable credentials, but doing so goes deeper than hopping onto a trend. Investment funds, traditionally the most profit-driven of human enterprises, today manage ESG-guided funds boasting more than USD$7.7trn in assets. The Financial Times continues to report that “corporate strategies that take sustainability into account can boost financial performance.”

There are operational benefits to sustainable practice, too. Reducing resources, streamlining production, optimising efficiency, and utilising recycled materials can all reduce costs. Customers are also more likely to be loyal if a company is sustainable. A recent McKinsey report found that “consumers care about sustainability—and back it up with their wallets.”

Despite this, however, there is a backlash against environmental, social and governance (ESG) initiatives happening right now. Whilst going green can drive business growth, profit as the champion business motivator has returned, and money is being pulled out of ESG-labelled funds as external factors such make the process of financing and running a business increasingly difficult.

Financial media is debating whether ESG is dead. But it still matters, deeply, whether business is good for the planet.

So, is this anti-ESG backlash motivated by planet, or profit? We have looked to the experts and found seven good reasons why sustainability is good for business.

1) Pursuing Green Innovations Boosts Competitiveness

Research has found a strong correlation between the pursuit of green innovation strategies and companies boosting their competitiveness.

Dr Bettina Becker, of Durham University Business School, found that the pursuit of green innovation strategies increases a company’s innovation success rate when compared with companies that don’t adopt such practices. The study finds that exploring green avenues boosts a company’s competitiveness by allowing them to enter new markets and build up new capabilities. Companies which follow green innovation strategies see a 3-4% increase in turnover due to the launch of new-to-market products.

2) CEOs With Compensation Linked To ESG Targets Act More Sustainably

ESG concerns have become embedded in corporate structures. From Blackrock CEO Larry Fink’s famous pro-ESG bent to CEO compensation being linked, controversially, to hitting ESG targets. But do ESG pay-incentives make companies more sustainable, or are they a way to help the public swallow the bitter pill of gargantuan paycheques?

Stefan J. Reichelstein, professor emeritus at Stanford Graduate School of Business, along with fellow researchers, investigated the pros and cons of linking CEO compensation to ESG targets.

They found that the number of companies that designate ESG metrics as key performance indicators for executives grew from just 3% in 2010 to a whopping 38% in 2021.

Whilst ESG pay has its critics who say that it is purely a PR exercise with little demonstrable benefit, Reichelstein’s study found that ESG pay does help companies achieve ESG targets.

“When firms include emission-specific metrics in their executive compensation packages, they also achieve a subsequent decrease in their CO2 emissions,” the researchers write.

There is also no evidence, the researchers say, that ESG pay has a negative effect on companies’ financial performance or share price. ESG pay, then, can help save the planet without sacrificing profit. Even critics will have to admit, this is pretty good deal.

3) Companies That Invest In Sustainability Become More Resilient

New research from Vlerick Business School has found that when a medium-sized enterprise invests in becoming more sustainable, its overall resilience increases.

Whilst the focus might linger on multinational and large-scale firms, sustainability transition is unachievable without the green efforts of SMEs – which now constitute more than 60% of value-added in Europe. Small business drives the U.S. economy, employs nearly half of the entire American workforce, and represents 43.5% of U.S. GDP.

But, smaller companies can also find adopting and investing in ESG practices a riskier, more unpredictable undertaking. To explore this, Professor David Veredas and Dimitrios Kolokas, both at the Centre for Sustainable Finance at Vlerick Business School, studied the impact of ESG performance on the credit risk of 350 SMEs as a measure of resilience, and found that when SMEs become more credit-worthy the more that they invest in sustainability.

In fact, an 11% increase in an SME’s ESG performance will decrease its credit risk by 3.5%.

4) Consumers Are More Forgiving If Faulty Products Are Environmentally Friendly

Research has found that consumers react less negatively to the failure of a product if it is billed as sustainable, when compared with a conventional product.

Rising concern over the climate crisis has created changes in consumer behaviour and, increasingly, consumer’s trust in products billed as sustainable. Interestingly, if one adds a dash of sustainability to a product people, as a rule, are more likely to treat any malfunctions with more tolerance.

Across empirical field analysis and controlled experiments, Dr Anshu Suri, of University College Dublin’s College of Business and Dr Ali Tezer, of HEC Montréal, investigated what happens when sustainable products fail or don’t live up to expectations. This included analysing consumer ratings on Amazon.com, consumer willingness to write negative reviews, and consumer preference for refunds over replacements.

They found that consumers want to help others avoid a bad experience while also supporting environmentally friendly products. This conflict leads to consumers reacting less negatively to the failure of green products than conventional ones.

“Consumers don’t overlook shortcomings of green products, but they are more forgiving, perceiving their restraint from negative feedback as a form of support for the environment,” says Dr Suri. “By not reacting negatively to green product failures, consumers believe they are being more prosocial, as negative reaction may harm the success of a product that benefits the environment and society.”

Please read the entire article here. This article was originally published in bluesky-thinking.com on April 17, 2024.