How will your organisation’s ESG strategy deliver the greatest long-term value?

In what ways do you expect your organisation’s ESG strategy to deliver the greatest long-term value? (Select up to four.)

The empirical evidence is increasingly clear: delivering on environment, social and governance (ESG) objectives is associated with improved financial performance for firms. In a survey of over 1,000 peer-reviewed research papers between 2015–20, researchers found a positive relationship between ESG performance and financial performance in 58% of the studies, with only 8% showing a negative relationship. [1]

What drives this association with stronger financial performance over time? It comes down to what changes are made—and why. Disclosing performance on ESG criteria for the sake of disclosure is insufficient and is not empirically linked to better financial outcomes. Focusing only on the ESG “inputs”, such as the level of energy efficiency across facilities or the composition of the C-suite, risks oversimplifying complex systems. If the goal is improved decision making, for example, companies need to develop a strategy to achieve that impact on the business. That means not only picking the right ESG targets, but also having a clear understanding of the processes and mechanisms that will lead to those targeted ESG-related outcomes.[2]

The first step is to identify the desired outcomes and impacts the firm wishes to see. From there, firms can develop a strategy to achieve those ESG outcomes, including what targets to set and metrics to track, and how operations and processes need to be adjusted to deliver on those targets. It’s also critical at this phase to determine which ESG factors are the right ones to focus on. Materiality to the firm matters here, as the set of relevant ESG criteria and targets will vary depending on your industry or geographic location, among other factors and conditions.[3] Selecting appropriate, relevant and deliverable targets is the foundation of a strong strategy.

With a coherent strategy in place, firms can begin to unlock value in the short term while pursuing stronger long-term performance as well. Organisational-level ESG initiatives are associated with better financial performance over time because they help to improve the fundamental ways in which firms operate. This includes improved risk management, greater innovation capacity, increased worker productivity and retention, and improved downside protection and more resilience during an external crisis or economic shock. These positive impacts seem only to improve with time; studies show that improved financial performance due to ESG becomes more noticeable over longer time horizons[4], meaning that investing in developing a robust ESG strategy today will help deliver greater enterprise value in the long run.