ESG activities correlate to stronger financial performance, study reveals

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Environmental, social, and corporate governance (ESG) activities, regarding sustainability, diversity and employee satisfaction, correlate with stronger financial profitability and growth for private companies, a joint study by Bain & Company and EcoVadis has revealed.

Titled “Do ESG Efforts Create Value?” the study assessed how ESG activities and outcomes have impacted 100,000 companies, 80% of which are private.

This research provides new insights into the advantages of ESG performance for private companies and underlines the imperative for private equity firms to factor ESG into their approach.

“Our findings provide much-needed perspective in the debate as to whether ESG activities correlate with financial performance,” Axel Seemann, advisory partner at Bain & Company commented.

“This new data shows that positive ESG outcomes are a trait of successful companies. This should encourage private companies and investors to confidently double down on ESG efforts. We only expect this correlation to strengthen as ESG data becomes richer and more nuanced.”

The research examined how various aspects of ESG activities revealed in EcoVadis scorecards —including implementing practices to reduce carbon and improve DEI, embedding sustainability into management processes and procuring sustainably—correlate with both ESG outcomes and financial performance.

The findings show that, in addition to benefiting the planet and society, ESG activities are associated with both stronger revenue growth and higher EBITDA margins.

The research outlined four correlations between ESG activities and business results:

  1. Companies with more women on the executive team have better financial results. Companies that rank in the top 25% of their industry for executive team gender diversity have annual revenue growth approximately 2 percentage points above that of companies in the bottom quartile. And their EBITDA profit margins are 3 percentage points higher than that same group.
  2. Renewable energy usage correlates with higher EBITDA margins in carbon-intensive industries. In the natural resources, transportation and industrial goods sectors, companies that use more renewable energy have higher EBITDA margins.
  3. Companies that focus on ethics, environmental and labor practices within their supply chains are more profitable. These companies have margins 3 to 4 percentage points above those that don’t focus on their suppliers’ ESG credentials.
  4. ESG leaders have higher employee satisfaction; companies with the most satisfied employees grow faster and are more profitable. They have three-year revenue growth up to 5 percentage points above those with less-satisfied employees and margins as much as 6 percentage points higher than those laggards. Beyond the basics of fair pay and ensuring a safe work environment, benefits may include career training, mental and physical healthcare, childcare, and educational opportunities, all of which boost employee satisfaction and, as a result, productivity and retention.
    According to the researchers, these findings emphasise the opportunities for private companies to improve their ESG efforts, which currently lag those of public companies. Only 35% of large private companies achieve top scores for carbon management, compared to 53% of large public companies, the research found.

“These findings should motivate companies at all levels of ESG maturity to redouble their investment in accelerating their sustainability journey,” Sylvain Guyoton, chief rating officer at EcoVadis added.

“For companies in nascent stages, this means developing sustainability management systems with policies, action plans and reporting. Companies at mature stages can pursue more advanced capabilities such as regenerative resource management and product circularity.

“Ultimately, cascading these practices into their value chains can support, for example, Scope 3 decarbonisation and circularity initiatives, and also puts those trading partners on the same path to value creation. Our research shows this hard work will be well worth it.”