By Shaji Mathew

Purpose. The reason an organisation exists. The impact it makes on others. The thread that binds its people and drives its actions. What it will be remembered for.

Increasingly, a company’s purpose is moving away from serving one goal, namely profit, or one group, namely shareholders, towards a broader objective that is linked to environment, social, and governance (ESG) factors and benefits multiple stakeholders.

Various studies show that when a company’s ESG agenda is echoed in its purpose, it results in improvement all around – in financial performance, productivity, and even employee engagement.  ESG aligned with purpose is not dampening profitability; indeed, in many organisations, it is driving it upward. It provides a way for enterprises of the climate change era to pursue meaningful growth – growth, that serves the preservation of the planet, the development of societies, and the interests of various stakeholders.

What does meaningful growth look like from a company’s perspective?

The loyalty of customers who are putting their money where their mouth is

Today’s consumers say that they will buy, switch, or avoid products based on their beliefs and values, and on a brand’s response to issues, such as climate change and racial justice, among others. This isn’t empty talk: A study of U.S. sales data between 2017 and 2022 covering 600,000 SKUs found that products with ESG-related claims enjoyed disproportionate sales growth, with a 1.7 percentage point advantage in CAGR versus products without such claims.

Organisations that are committed to ESG values are more likely to be trusted by consumers, and to benefit from their patronage and advocacy. They will enjoy easier entry into new markets and stronger top-line growth. Sustainability initiatives will become an important driver of business expansion.

The loyalty of employees who want companies to take a stand

In June 2020, Facebook employees did a “virtual walkout”, dismayed by their company’s inaction against President Trump’s posts threatening violence against protestors in Minneapolis. Today’s employees are standing up for the values they hold dear, asserting themselves against unfair workplace practices, or “conscious quitting” companies whose social stance doesn’t sync with their own.

But give them a sense of purpose and a “prosocial” environment and they will work harder, stay longer, and perform better. Companies with a strong ESG proposition stand to attract and retain the best talent and benefit from their productivity and engagement. Some years ago, it was found that the stocks of companies that were rated the best employers achieved  2.3 percent to 3.8 percent higher returns annually compared to peer companies over a 25-year period.

The confidence of regulators who will leave business alone

Fighting climate change is the biggest priority of governments worldwide. In most countries, regulators are deeply involved in driving their ESG agenda. In Europe – the clear leader in sustainability – regulations, such as the new Corporate Sustainability Reporting Directive and the yet-to-be-adopted Corporate Sustainability Due Diligence Directive will hold company boards accountable for transparency in ESG reporting, and for respecting human rights and the environment in their decisions.

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Organisations with proven ESG credentials would earn the confidence of regulatory authorities, which could potentially result in lighter supervision, more operational freedom, or approvals for entering new markets. At the very least, it will mitigate the risk of government intervention, strictures, and penalties, which is a major advantage for highly regulated industries, such as banking or pharmaceuticals, where a large chunk of value is at risk from regulatory intervention.

Superior financial performance linked to lower resource costs

A well-thought-out and executed ESG strategy can reduce operational costs quite significantly. Studies have concluded that companies making efficient use of energy and water resources also record better financial performance, with the most sustainable companies achieving the best results. In fact, the link between ESG and financial performance is so clear that when investment firms use both internal and external agency ESG ratings, they earn 6.90 percent higher returns than the S&P 500.

Technology is a critical enabler here. Let’s talk of the cloud, which can dramatically reduce enterprises’ energy costs by shifting workloads away from their energy-guzzling on-premise data centres. Along with cloud, AI, machine learning, IoT, digital twins and other solutions are taking sustainability to new levels. GE Energy, for example, creates a digital twin of power plants and models key components after considering metrics such as fuel and electricity costs. This enables power plant operators to optimize the mix. One customer improved its energy output by 2 to 3 percent, saving $15 million in each plant.

Thrive and survive

Purpose-led ESG enables meaningful growth – growth that also benefits the planet and its people to create a hopeful and progressive future for all. It also provides defence against ESG risks, which are becoming more prominent with the transition towards sustainability. Businesses that neglect their ESG risks can alienate customers and investors, and fall foul of regulators, with serious consequences ranging from hefty fines to loss of reputation to closure even. Today, companies must respect the interests of multiple stakeholders to succeed. The meeting of organisational purpose and ESG agenda makes sure of this.

(The author is Group Head – Human Resource Development at Infosys. Views expressed are personal.)