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sustainability

Five ways that ESG

creates value

Getting your environmental, social,
and governance (ESG) proposition
right links to higher value creation.
Here’s why

Witold Henisz, Tim Koller, McKinsey
Robin Nuttall, Wharton School of the University Just as ESG is an inextricable part of how you do
of Pennsylvania business, its individual elements are themselves in-
tertwined. For example, social criteria overlaps with
our business, like every business, is environmental criteria and governance when com-
deeply intertwined with environmen- panies seek to comply with environmental laws and
tal, social, and governance (ESG) broader concerns about sustainability. Our focus is
concerns. It makes sense, therefore, mostly on environmental and social criteria, but, as
that a strong ESG proposition can every leader knows, governance can never be her-
Ycreate value—and in this article, we metically separate. Indeed, excelling in governance
provide a framework for understanding the five key calls for mastering not just the letter of laws but
ways it can do so. But first, let’s briefly consider the also their spirit—such as getting in front of viola-
individual elements of ESG: tions before they occur, or ensuring transparency
• The E in ESG, environmental criteria, includes and dialogue with regulators instead of formalisti-
the energy your company takes in and the wa- cally submitting a report and letting the results spe-
ste it discharges, the resources it needs, and ak for themselves.
the consequences for living beings as a result. Thinking and acting on ESG in a proactive way
Not least, E encompasses carbon emissions has lately become even more pressing. The US
and climate change. Every company uses ener- Business Roundtable released a new statement in
gy and resources; every company affects, and is August 2019 strongly affirming business’s commit-
affected by, the environment. ment to a broad range of stakeholders, including
• S, social criteria, addresses the relationships customers, employees, suppliers, communities,
your company has and the reputation it fosters and, of course, shareholders (1). Of a piece with
with people and institutions in the communities that emerging zeitgeist, ESG-oriented investing
where you do business. S includes labor rela- has experienced a meteoric rise. Global sustaina-
tions and diversity and inclusion. Every com- ble investment now tops $30 trillion—up 68 per-
pany operates within a broader, diverse society. cent since 2014 and tenfold since 2004 (2). The
• G, governance, is the internal system of practices, acceleration has been driven by heightened social,
controls, and procedures your company adopts governmental, and consumer attention on the bro-
in order to govern itself, make effective decisions, ader impact of corporations, as well as by the in-
comply with the law, and meet the needs of exter- vestors and executives who realize that a strong
nal stakeholders. Every company, which is itself a ESG proposition can safeguard a company’s long-
legal creation, requires governance. term success. The magnitude of investment flow

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