Study Shows Sustainable Businesses Are More Profitable

According to Edie, a new study published at the end of April reveals that activities related to environmental, social, and governance (ESG) factors have had an impact on the financial performance of 100,000 companies. This would demonstrate that sustainable businesses are more profitable.

The study, published by Bain & Company and EcoVadis, covers 80,000 private companies and another 20,000 listed companies globally. Business performance was tracked across a variety of countries and sectors. These findings could also be relevant for companies that still view sustainability as a cost rather than an investment.

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ESG delivers higher profitability

A sustainable business considers more than just profits: it also considers its impact on society and the environment. This type of business is sustainable because it contributes to the health of the structure within which it operates, thus helping to build an environment in which the business can thrive.

In addition to the benefits to the planet and society, sustainability measures are also related to a company’s financial performance. The research shows that the connection between sustainability and business performance is evident, provided that clear ESG targets are set and results are accurately tracked, and sustainability is incorporated into management processes.

Although not all analyses yielded a positive correlation, the research revealed that ESG activities do not negatively affect a company’s financial condition, and in fact, can be correlated with improved financial performance and higher EBITDA margins, a financial measure used to assess a company’s profitability. In fact, the findings indicate that positive ESG results are a trait of successful companies.

Sustainable businesses are more profitable

Undoubtedly, many factors influence a company’s financial performance and it is not possible to exclusively attribute financial success to the sustainability efforts of these companies. However, these early findings are encouraging and the ESG landscape remains nascent. As ESG data becomes richer and more detailed, finding even stronger evidence of the relationship between ESG activities and financial performance will provide greater certainty.

The study highlights four strongly positive correlations between ESG and profitability. One is that companies with the most satisfied employees have three-year revenue growth [from 2019 to 2021] of up to 6% above those in their sectors with the least satisfied employees.

Furthermore, in the companies with the least satisfied employees, the average net profit margin was 10%. In companies with the most satisfied staff, this increases to 16%. Employees at companies with a strong ESG focus are more likely to be satisfied, as they are more likely to have a fair salary and a safe working environment. These companies are also more likely to offer additional benefits, such as child care, health care, networking, and training.

Another opportunity to align profitability and sustainability is through a focus on energy efficiency and renewable energy procurement. The study found that the correlation is particularly strong in energy- and carbon-intensive industries, such as transportation and manufacturing. In addition, the benefit was strongest in carbon-taxed markets, such as the European Union.

Diversity in the boardroom, an area of opportunity

The third opportunity highlighted in the Bain & Co and EcoVadis study is ensuring diversity in boardrooms. Companies with the highest proportion of women on their senior executive team grew twice as fast between 2019 and 2021 as those with the lowest proportion. There was also a 3% difference in median net income between these two cohorts of businesses. Bain & Company attributes this trend to the fact that more diverse leadership teams can provide “a broader view of opportunities and risks.”

The final area of opportunity noted by the study is a sustainable supply chain, which refers to managing suppliers and procuring raw materials and services in an ethical, environmentally responsible, and socially just manner. This involves ensuring that suppliers comply with ethical and environmental standards, as well as labor laws, and working with them to improve their practices if necessary.

It is worth noting that the study found that, in general, publicly traded companies are focusing and investing much more in ESG than private companies. As such, the authors are urging leaders of non-publicly traded companies to step up to the plate.

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(Featured image by geralt via Pixabay)

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