Environmental, social, and corporate governance (ESG): investing in a better future

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  Quantumrun Foresight
• November 2, 2021

Environmental, social, and governance (ESG) principles, which spotlight ethical and sustainable practices, have evolved from optional to essential in business operations. These principles drive business benefits, including top-line growth, cost reduction, and improved productivity, while influencing a societal shift towards equity, transparency, and sustainability. However, the transition may trigger challenges, such as potential job losses in certain sectors and short-term cost increases for consumers.

Environmental, social, and corporate governance (ESG) context

The Environmental, Social, and Governance (ESG) principles gained prominence through a pivotal 2005 study by the International Finance Corporation (IFC). It demonstrated that enterprises placing high value on ESG factors reaped substantial benefits over time. Consequently, ESG-oriented businesses have exhibited a greater capacity to mitigate risks and enhance sustainable growth. Over 15 years following this seminal research, ESG has undergone a transformation, evolving from an optional framework to the new norm in global business operations.

Enterprises are confronted with the reality that the traditional approach to conducting business is no longer sustainable. Modern corporations are expected to be acutely aware of the ethical implications of their operations and labor practices. This shift in outlook has been fuelled in large part by an increased global emphasis on mitigating the harmful effects of climate change. For instance, in the aftermath of the devastating Australian bushfires in 2020, there was a marked shift toward investments in wildlife protection. 

In this climate-conscious era, the surge in sustainable investments stands as testimony to the paradigm shift in investor preferences.It is estimated that more than USD $20 trillion is invested in assets that are managed under the principles of sustainable investing. Some recent case studies include BlackRock, one of the world's largest asset managers, which in early 2020 announced its commitment to place sustainability at the center of its investment approach. Similarly, a growing number of venture capitalists are also incorporating ESG considerations into their investment decision-making process.

Disruptive impact

ESG-aligned firms enjoy an array of long-term advantages, according to global management consulting firm McKinsey. First is top-line growth, which becomes possible through fostering supportive partnerships with communities and governments. For instance, companies could actively support local initiatives or collaborate with government agencies on sustainability projects. These efforts often translate into increased sales, as consumers are more inclined to support businesses that contribute positively to their communities and the world at large.

Cost reduction presents another significant benefit. Companies that pivot towards environmentally friendly production methods, such as water conservation and reduced energy consumption, can experience substantial savings. For example, if a beverage company invests in water recycling technology, it not only reduces its environmental impact but also decreases its water procurement costs over time. Similarly, utilizing energy-efficient equipment and renewable energy sources can lower electricity expenses, leading to significant cost savings in the long run.

Lessened regulatory and legal intervention is another advantage for companies that adhere to labor and environmental laws. Companies complying with these regulations tend to face fewer lawsuits and penalties, avoiding costly litigation and damage to their reputation. Furthermore, ESG-oriented firms often report increased productivity, as employees tend to be more engaged when working for socially responsible companies. Employees at such firms may feel a stronger sense of purpose and pride in their work, leading to improved performance and reduced staff turnover.

Implications of environmental, social, and corporate governance (ESG)

Wider implications of ESG may include:

• The development of a more equitable labor market, as businesses adhering to ESG principles prioritize fair employment practices, leading to increased diversity and inclusion.


• The fostering of a culture of corporate transparency and accountability, promoting trust and stability within business ecosystems and society.


• A reduction in wealth disparity, as ESG-focused companies often prioritize fair pay, contributing to greater income equality.


• Greater resilience against global economic downturns, as ESG-oriented companies typically have more robust risk management practices.


• Technological innovation stimulation, as businesses seek more efficient, sustainable methods of production to meet ESG standards.


• A potential boost in political stability, as governments and companies align their objectives with the broader societal goals and ESG frameworks.


• An enhancement of public health outcomes, as businesses committed to ESG often implement measures to reduce harmful emissions and environmental pollutants.


• Possible job losses in certain sectors, such as fossil fuels, as companies transition to more sustainable practices in alignment with ESG principles.


• The risk of greenwashing, where companies may falsely or excessively promote their ESG efforts to gain market advantage.


• An increase in the cost of goods and services in the short term, as companies invest in sustainable practices, potentially passing these costs on to consumers.

Questions to comment on

• Would you consider investing only in sustainable companies? Why or why not?


• Would you be willing to buy only sustainably made products? Why or why not?