Environmental, Social and Governance in the Supply Chain: Driving Value

ESG and Return on Investment (ROI)

While some may argue that a company would need to sacrifice profits for ESG, this notion has been disputed as companies with ESG programs not only achieve their overarching goals, but also deliver value and ROI. Below are five areas within an organization that can see increased value with ESG.

Competitive Advantages – Companies that have strong ESG practices will have a decided advantage over competing organizations that do not. A business that can prove its commitment to environmental and social issues can show that they are more stable, dependable and a reliable choice for investors and partners. JP Morgan⁴ stated that there was growing evidence of a positive correlation between ESG and financial performance. Another study⁵ found that for every one extra point in ESG score cumulative excess returned, they realized an 8% increase.

Labor and Productivity – Over the past 10 years in almost every survey of the material handling industry, the number one challenge has revolved around the scarcity of labor. Companies that inspire employees to act in tandem toward a positive, prosocial goal can encourage them to perform at higher levels while creating loyalty toward the company. A business devoid of ESG initiatives can be viewed to only care about profits; and if an organization doesn’t care, why should its employees? With Millennials and Gen Z moving into the dominant labor demographic, multiple reports and studies have shown that a company’s positive or negative approach to ESG will greatly affect a prospective employee’s decision to work for the company.

Long-Term Capital Investments in Sustainability – Many operations will come to a crossroads when less efficient and less sustainable equipment reaches the end of its useful life. Some might choose to travel the inexpensive route with equipment that does nothing to reduce an operation’s carbon footprint or emissions instead of choosing ESG-friendly equipment which could have a higher upfront cost but will realize more savings long-term. Companies could find themselves behind the curve when new regulations come into play. By starting the process now, operations can start to realize the benefits and advantages of using clean and efficient equipment and energy.

Operational Cost Reductions – By creating ESG plans and projects that target savings in energy consumption and reduction of waste, a company can see significant cost savings across the board. Owens Corning⁶ believes that they will achieve $1.6 million annually in cost savings contributed to 31 sustainability projects that have a 1 to 3-year ROI. Some of the projects they are currently engaged in are:

• Efficient lighting
• Compressed air efficiency
• Efficiency upgrades for pumps, motors and infrastructure
• Operational improvements with automation and process optimization
• HVAC efficiency

Reduced Dependency on Fossil Fuels – Market fluctuations, geopolitical conflicts, as well as other factors can all unexpectedly drive-up fuel costs and availability. This volatility can take a significant bite out of margins and increase operational costs. Investing in clean, renewable, zero emissions energy like solar, wind, hydro and geothermal can lessen an operation’s dependency on fuel costs that they cannot control. Electric vehicles both inside and outside the warehouse can also create a cleaner and safer environment for employees and customers.

Sustainability Investing and Future Regulations will Drive Adoption

Over the past five years, there has been a stronger belief from the investment community that ESG performance will be a prime indicator of overall performance and value. In a 2018 survey¹², 32% of investors conducted an ESG performance review of potential organizations to invest in; by 2020 that number increased to 72%.

Pressure to adopt ESG practices will also come from governmental regulations and financial organizations. The Securities & Exchange Commission (SEC) is investigating an effective ESG disclosure system compelling publicly traded businesses to indicate their ESG programs and risks.

The SEC acting Director of Corporate Finance, John Coates, recently said, “The SEC is well equipped to lead and facilitate a discussion on when and how ESG risks and data must be disclosed, and how to create and maintain an effective ESG-disclosure system that would promote the disclosure of decision-useful, reliable and, where appropriate, globally comparable ESG information.”

Companies that adopt a “do nothing until forced to” strategy could find themselves facing challenges not only from an ESG reporting perspective, but also from a reputational and customer loyalty standpoint.