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September 23, 2022

Link between ESG and profitability exists: New research

Businesses which express commitment to ESG have seen profits jump 9.1% over the past three years, says accountancy firm Moore Global.

By Adrian Murdoch

ESG link
New research from Moore Global shows a clear connection between ESG and improved financial performance. (Photo by Gualtiero Boffi/ShutterStock)
  • Companies that place importance on ESG factors have seen profits rise 9.1% and revenues grow 9.7% over the past three years.
  • As many as 84% said that their ability to raise capital had become slightly or significantly easier.
  • While service sectors such as IT and finance have embraced ESG, the public sector lags.

The debate about sustainability versus profitability continues. The turf war, especially in the US, has gone so far that some red states have drafted anti-ESG bills, putting what they deem, perhaps inevitably, as woke business practices on the defensive.

The more swivelled-eyed end of the Republican Party in the US is one thing, but it is a view still articulated in the US corporate bible – the Harvard Business Review. An April article pointed out that many leaders still see “an inherent trade-off between choosing a more sustainable future and achieving business growth and profit”.

But a report published last week (15 September) by global accounting firm Moore Global argues that companies seeking to embrace ESG principles in recent years enjoyed higher revenues, stronger growth of profits and greater access to finance.

Moore Global commissioned London-based economic consultancy, the Centre for Economics and Business Research (Cebr) to survey senior decision makers at 1,262 companies with more than 250 employees in Australia, France, Germany, Italy, the Netherlands, the UK and the US between May and June this year to consider the impact of ESG on business performance. The research breaks down ESG into environmental, social and governance pillars.

A bump in revenues

Companies across the world that claim to place an importance on ESG – defined as the company’s assessment of their own practical action over a defined time horizon – saw revenues significantly outperform those companies that openly disregard its importance between 2019 and 2022. Those that did saw a revenue bump of 9.7% versus only 4.5% for those that didn’t.

For those companies that regard ESG as important, the regional differentiation was comparatively small from 10.4% in the US to 9.3% in Europe and 9.1% in Australia.The differences were more marked for those that did not rate the importance of ESG. It slipped from revenue growth of 4.9% in both the US and Europe to 2.6% in Australia.

In total, companies which have engaged with ESG factors have seen revenues grow by $3.1trn. The US leads the way with $2.1trn followed by Europe at $930.5bn and Australia at $58.8bn. For companies that have not engaged with ESG, the whole sample saw revenues of $402.4bn. Again, this was led by the US at $254.2bn followed by Europe at $144.3bn and Australia lagging at $3.9bn.

With profitability over the three-year period, the figures were more divergent. Businesses publicly placing greater importance on ESG saw an average increase in profits of 9.1%. But this jumped to 11% in the US [Chart 1] versus 8.1% in Europe and 7.4% in Australia.

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“Conceptualising it into wider economic themes, the US economy has performed better than European counterparts over that time horizon,” says Sam Miley, senior economist at Cebr and lead author of the report.

The report says that the difference between the revenue and profit figures reflects the lag between the investment most companies made to implement new ESG principles and them coming into effect.

The majority of companies practice what they preach with more than half of respondents in all sectors defining ESG in their public strategy documents or sustainability reports. Almost three-quarters (75.4%) of those in manufacturing and distribution disclose environmental targets.

Money magnet, especially in the US

As well as improved revenues and profitability, a significant finding in the report is the extent to which companies that follow ESG find it easier to attract investment. As many as 84% said that the ability to raise capital had become slightly or significantly easier.

It was in the US that companies saw ESG as the greatest benefit in raising funds. There almost half (48.1%) said that ESG had significantly improved their ability to attract investment from external sources, though the type of funding is not disclosed. It was followed by Italy (41.8%) and Germany (37.5%).

Not all companies are seeing a material benefit. In the Netherlands only 18.8% of companies said that it significantly helped them raise funds. It should be noted, however, that 68.8% of companies said that incorporating ESG into business practices “slightly improved” their ability to raise funds.

Broken down by sector, 92.9% of companies within the IT sector around the world said that a commitment to ESG had significantly or slightly improved their ability to raise capital. The “standout performer” is how Cebr's Miley describes it.

The IT sector was followed closely by accounting and finance (92.3%).

“More energy-intensive industries have a tougher time of changing their operations to fit in line with ESG principles, whereas service sectors such as IT would probably find that transition a lot smoother,” Miley adds, talking about the different scale of difficulty of heavy industry versus office-based work.

The laggard in terms of sectors is the public sector, says Miley emphasising environmental and social concerns in particular.

Only 72% of public sector companies said that a commitment to ESG had made raising funds easier, indeed it was the sector where almost a third of respondents (28%) said that it had made no difference at all.

Funds are nothing without good staff  

Triggered by the Covid-19 pandemic, what has been dubbed “the great resignation’ remains on companies’ minds. A May survey from PwC of 52,000 workers across 44 countries, for example, found that the workforce is the number one risk to growth.

The Moore Global survey gives ESG-focused companies some hope. Despite the current climate of skills and staff shortages and difficulty in attracting new employees, companies that place greater emphasis on ESG have seen headcount grow twice as fast as those less committed.

Almost 10% (9.9%) of companies that emphasise ESG publicly reported headcount growth versus 4.8% of companies that don’t.

Mary Tressel, Moore’s global sector lead for ESG, commented in the report that ESG has moved on from “nice to have”. It could now be “the answer many companies are looking for” if they want to differentiate themselves and secure both growth and profitability.

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