Corporations have often taken the position that when it comes to sustainability or other socially responsible issues, the costs outweigh the benefits for the bottom line. In his book Capitalism and Freedom, published in 1962, economist Milton Friedman wrote:
“There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
This is largely the maxim corporations have followed in the decades since. Yet, the world we live in is a very different world from the one in which Friedman published his book in 1962. A wealth of research published in recent years has called for a re-evaluation of that belief system. In addition, the increasing effect of global climate change on business has forced many companies to take a fresh look at incorporating sustainability issues in business. Research is showing that it is possible to incorporate environmental, social, and governance (ESG) factors into a thriving business model.
A Journal of Business Ethics study found that the top 100 sustainable global companies saw higher mean sales growth, return on assets, and profits. Researchers at Harvard University and London Business school compared two groups of 90 companies who were in the same sectors, of a similar size, and with comparable operating performance and growth opportunities. The difference was that one group of companies had incorporated sustainability measures in their models and made long-term investments in this area. An investment of $1 in 1993 in companies with sustainability practices grew to $22 by 2010. The same investment in companies without these measures grew to $15. The companies with sustainable programs also saw an increase of 16% in return on equity and a 34% increase in return on assets.
The University of Oxford and asset manager Arabesque also examined studies about how companies with ESG practices performed. They found that 80% of studies showed positive stock price performance, 88% showed better operational performance of firms, and 90% of studies showed that ESG measures lowered the cost of capital.
Incorporating ESG and sustainability practices do not require new approaches per se but they do require diligence. A McKinsey study suggests a familiar business practice:
- Identify issues and set priorities
- Set goals
- Create accountability
ESG is no longer “green window dressing.” Companies who have felt the fallout of multiple natural disasters linked to growing climate change have recognized that adopting these practices is not just “a nice to have” but an imperative if they wish to continue to business operations.