The ESG conundrum

ESG can be an accelerator that drives profitability and growth.

Do we really need ESG? Some think ESG is necessary to manage 21st century risks, while others say it merely obstructs business.

While the conversation has become controversial, with pundits pitting the ethics of environmental, social, and governance (ESG) initiatives against their economic costs, the data tells a different story.

Contrary to popular opinion, we found that ESG and profitability are not at odds. Top-performing companies don’t make trade-offs between sustainability, social responsibility, good governance, and shareholder value; they achieve all these outcomes at once. The argument that ESG hampers a company’s ability to boost the bottom line is more than a myth—it’s misinformation that leads to poor business decision-making.

The key is to see ESG as a transparency enabler. When viewed as a vehicle for driving business value—rather than a narrow reporting exercise—ESG generates insights that create opportunities and boost performance.

But only a few companies have reached the next level. Rather than strategically harnessing ESG data—using it as a tool for identifying opportunities to innovate and improve—many organizations are narrowly focused on meeting immediate compliance demands. To deliver better business results, leaders need to see ESG trans­parency through a new lens.

“ESG leaders are 43% more likely to outperform on profitability—and 52% more likely to say ESG efforts have a huge impact on profitability.”

And the need for change is urgent: consumers are increasingly skeptical of ESG claims. Only 20% of consumers say they trust the statements companies make about environmental sustainability, down from half just two years ago.

Consumer trust in corporate sustainability statements has plummeted

What’s causing this decline? A lack of progress is partly to blame. Our survey found that, while 95% of organi­zations have developed ESG propositions, only 10% have made significant progress toward their goals. Executives name inadequate data as the greatest obstacle—even more of a hurdle than regulatory barriers and inconsistent standards.

This might be why 6 in 10 executives say they have to make tradeoffs between financial and ESG objectives. Without the ability to access, analyze, and understand ESG data, they can’t accurately predict which plans will both improve outcomes and deliver high ROI. To stop making unnecessary bargains, executives need to think more broadly about ESG. They must prioritize transparency, break down barriers to ESG data—and funnel key insights back into the organization.

Learn more: IBM