Investments in businesses have a determining factor that is great for the environment and has finally gone mainstream. Today, investors consider the compliance of a particular venture to environmental, social, and cooperative governance (ESG) values as a result of transparency regarding how certain enterprises work.
Capitalism with advocacy is the foundation of the new wave of social consumerism, and those with money to invest are starting to put pressure on businesses to adhere to their principles. Suppose consumers find that a particular company is not in agreement with their personal, moral values. In that case, some threaten to boycott the enterprise altogether and become a client for another business instead, one that embodies similar values.
ESG practices can be profitable for both the investor and the business owner, depending on the responsibility with which the concept is handled. The initiative has to seem authentic to the consumer without damaging the company’s image or margins. It would also be wise to highlight these on an improved web design to allow for a kind of rebranding so that the company can be seen in a better and progressive light from the perspective of the potential customers. Here are some considerations entrepreneurs can make to help them decide on the inclusion of ESG in their strategies:
Profitability May or May Not Change
One of the main concerns of business owners, when they are asked to shift towards a new mode of production or a new expansion strategy, is cost. For instance, manufacturers already have a fixed process that may be difficult to change. Their machinery could be fixed on specific settings that are only applicable to the previous mode of production and cannot be adjusted to meet new specifications. This means that they will have to buy new equipment, train staff with the new technology, etc. It all entails cost.
On the other hand, this can be an opportunity for companies to increase the price of their product or service. Since social consumerism is on the rise, and customers are willing to pay higher costs for ethically-produced items, shifting to a process that is compliant with ESG values can be a justification for a price hike. With the right business plan, this can offset the cost from the shifts in production while introducing the brand to a new consumer base.
Affirmative Action and Its Effect on Productivity
Affirmative action continues to be a controversial topic today because of its perverse disregard for equality. By providing certain employees special treatment over the rest solely because of race, it could lead to a loss in productivity and impact the overall work environment. Rather than hiring the person with the qualifications that match what the company is looking for, affirmative action pressures entrepreneurs to see color instead of a person so that they can meet a quota set by the “S” in ESG. Though it may have arisen from good intentions, affirmative action has become a regressive way of deciding who to hire.
It could encourage investors who enjoy moral grandstanding and virtue signaling compared to those who see work ethic- regardless of race- as a reason to invest. This challenges hiring managers by making sure that they avoid a potential lawsuit against the company for discrimination. It is a tricky aspect of ESG values that can affect the overall productivity of the company.
Value-based Investors Versus Traditional Investors
Traditional investors look at the portfolio of the company, along with other factors, before they decide on whether they should invest in it. Conversely, value-based investors tend to be more focused on the story behind the company — its employees, source of raw materials, and beneficiaries. They tend to be more emotional and like the idea of their money going toward something good while earning off of the potential returns it can bring.
One of the barriers that ESG investing needs to overcome is its disparity with traditional portfolios that concentrate on the money instead of the company’s corporate social responsibility. Sustainability reports often target these individuals instead of those with the intent of placing their money in profitable investment vehicles.
Although ESG has hit the mainstream, there is still a long way to go before it becomes a more common form of investing. It continues to make an impact on how businesses are run by adding pressure on the owners to focus on sustainability rather than profitability. Shifting company strategies to abide by these principles may be too early, but those who do not could get left behind.