Tony Paradiso
December 23, 2021
How to pay attention to ESG’s environmental standard — and save your company money
By Tony Paradiso
In previous columns we defined ESG (Environmental, Social, Governance) and outlined the positive role it can play for small-to-medium sized companies. We also summarized how to use a SWOT analysis (strengths, weaknesses, opportunities, and threats) to identify specific aspects of your business that can be leveraged to enhance your ESG profile.
In this column we’ll wrap up the series by highlighting how ESG can not only make your company more responsible, but also enhance the bottom line.
Being a good community partner and responsible steward of the planet should be a goal for most, if not all businesses. However, as businesses, it’s also essential to generate profits to sustain our efforts. This is one of the headwinds for the widespread adoption of ESG strategies. There is a perception that doing the right thing can often hurt the bottom line. But if implemented properly, it doesn’t have to. In fact, it can improve profitability.
The environmental component of ESG is the easiest to profitably implement. There are numerous environmentally friendly steps that can be taken to reduce costs. These include reducing energy consumption by leveraging the state’s energy efficiency programs and investigating solar options including no-cost community solar.
An assessment of your daily operations can also yield savings. Are you maximizing the use of electronic documentation to minimize printing of hard copies? Are your lights on timers or motion sensors to ensure that they’re only on when needed? There are myriad ways you can reduce your carbon footprint (and expenses) if you take the time to examine your work habits.
Beyond these measures, looking into the use of more environmentally friendly materials should also be considered. Recycled paper may be more expensive, but if you’ve managed to lower costs in other areas, you can offset the cost of transitioning to slightly more expensive supplies.
Lastly, a thorough vendor analysis can yield indirect benefits. The challenge here is to identify vendors/suppliers who have taken their own ESG-related measures. Hopefully many of your existing vendors have adopted ESG strategies. But if not, the next step would be to determine the cost and delivery impact of potentially changing vendors.
Another goal of this vendor analysis is to understand where your vendors and suppliers are heading. It may well be that they haven’t made much progress today but have plans in place to continually improve their environmental status. If that’s the case, you can stick with existing vendors and leverage the progress they make over time.
This vendor review may or may not result in financial savings and it requires resources. But whether you make immediate changes or not, the exercise will provide information that could yield future dividends.
The social and governance components of ESG don’t necessarily lend themselves to direct expense reduction. Their potential benefits to the bottom line relate to the ability to recruit talent, retain employees, and even reduce the cost of capital.
The younger generations aren’t like the baby-boomers. It isn’t all about how much money you can make and the path to advancement. To attract talent today, companies need to demonstrate they are good corporate and community citizens. Thus, evaluating your overall contribution to the community can be critical.
Here again, it doesn’t necessarily have to result in added costs. For example: you can sponsor volunteer efforts or spearhead fundraising for local causes.
In terms of governance, an area in which most companies can improve is in establishing company values and overall communications. I’m a believer in sharing not only the company’s strategy with employees, but the logic behind the strategy. Doing so helps employees understand why certain decisions or actions are taken, and this can lead to a higher level of buy-in at all levels. Today, doing so can also improve your ability to recruit and retain good talent.
Lastly, improving your ESG status can in some cases lower your cost of capital. This relates to sustainability. If lenders and investors consider your strategy risky in the long term because of ESG-related issues, their inclination to provide capital may diminish. And if they do provide capital, the cost could be higher.
The point is that when doing an assessment of your ESG status, first try to identify changes that can be made that can also benefit your financial goals. Keep in mind though, that whatever you do needs to be consistent with your company’s culture and long-term strategy.
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