Revenue growth is a good indicator of successful company’s operations, but profitable growth is even better. However, it is increasingly emphasized that profitable growth that improves the implementation of ESG (Environmental, Social and Governance) is the most preferred, having in mind that the most successful companies targeting long-term sustainable business should choose a strategy that brings together these three effects.
Stable and profitable growth is difficult to achieve during the global financial crisis. It is of crucial importance to clearly prioritize growth in the way of thinking, to base the strategy on it, but also all the activities and resources that are necessary for its execution. Many executives believe that sustainable, transparent and inclusive growth requires compromises, forgoing revenue and profit for the sake of society and the planet. However, the analyses show a different pattern. Financially successful companies have integrated ESG priorities into their growth strategies. The conclusion is that it is not enough for them to do business successfully in their industry, but that their activities should contribute to the creation of a better environment in which they operate.
Five challenges that companies are facing with
Reaching an ESG strategy requires the transformation of the company and the implementation of approach that is focused on people and changing their behaviour. Therefore, it is an important mission that must be done, and human habits that are difficult to change, further complicate the achievement of this goal. Five challenges have been identified on this topic within most companies:
- There are real obstacles that threaten organizations’ efforts to influence the environment and society, such as inflation, supply chain disruption, rising energy costs, or geopolitical conflicts. They are real challenges. Leaders will need to determine where they are willing to give up short-term gains for long-term success, and then educate their people to manage the challenges they will face along the way. Otherwise, they risk these responsibilities falling to the bottom of everyone’s list or postponing them indefinitely.
- The question “Why are we doing this?” will often be asked. It is not enough to say that all these efforts are the right thing to do for the company’s results and that they have a good impact on the environment and society. Company leaders must be well-prepared, tell a story that makes this strategy important to everyone and at all levels in the organization.
- ESG must be part of everyday conversations. It is best to avoid making the efforts of companies that impact the environment become something that is present only on the Earth Day. These activities cannot be seen as a single campaign or initiative. Environmental and social impact must be fully integrated into business strategy and processes, as well as into the cultural values of all employees.
- The one-size-fits-all model will not work. Employees will be affected by the decisions made related to ESG and different levels of effort will be required from them. This implies a multi-level approach to change, balancing the support of all employees, and only some will be able to deliver it through the work they perform. They will need a detailed roadmap of ESG assignments, to clearly guide them on what they are expected to do, at each stage of this process.
- This work cannot be done by one team alone. Successful efforts to make a positive impact on the environment and society require many groups to work together to play their part. When this happens, the absence of a clear line of responsibility or the assumption that other individuals or teams will take the lead can jeopardize the realization of the ESG strategy. The best effect is achieved if this strategy is led by the general manager or owner of the company, who are usually the initiators and who identify with the success of these efforts.
Five principles of how it is possible to achieve the triple effect
Companies that succeed in this process tend to be guided by five principles: integrating growth, profitability and ESG into the core strategy; innovation of products/services to create new value; using M&A to achieve faster ESG growth; transparently monitoring and reporting on ESG, and finally embedding strategic priorities in the organizational DNA.
- Integrate growth, profitability and ESG into core strategy. The companies that best implement change do not follow ESG-related initiatives from the sidelines, but integrate them into the overall corporate strategy for growth and profitability.
- Innovate the offer/service to drive value creation. Companies that achieve the triple effect often work on innovations and improvement of both – what they do and how they do it. Many are focusing their efforts on innovation by developing products or services to better meet customer needs—and, where possible, meet new ESG-based requirements.
- Execution of the M&A (Mergers and Acquisitions) option to achieve ESG implementation at a faster pace. Mergers and acquisitions of companies engaged in a complementary activity or service can accelerate a company’s growth. Successful companies tend to seek partners to speed up their own growth in less covered business segments.
- Report and communicate transparently. We often hear business leaders lament that market participants do not recognize the investment their companies have in the initiatives with a longer time horizon, which is often the case with ESG initiatives. While there are many reasons, intensive reporting, and proactive communication to the broader community about how these initiatives are adding value, along with goals and progress, are critical to understanding the full benefits. Communication alone will not lead to value, but transparency can accelerate the recognition of future potential by investors or investment funds. Once a company sets clear and ambitious goals, it must continuously demonstrate where the value comes from and show the steps it is taking, so that progress is clear to customers, investors and the market.
- Embed strategic priorities into the DNA of the organization. Companies that achieve the triple effect of growth, profitability, and sustainability plan concrete initiatives as part of a new corporate strategy. Management teams set clear responsibilities, measure performance and goals and adjust their operations. They also redirect their resources to these new opportunities and ensure that internal processes encourage middle management to integrate relevant criteria—including ESG—into their day-to-day decisions.