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Companies that perform well financially do even better when they commit to a strategy that incorporates ESG.

Companies That Focus on ESG Outperform Their Peers, Study Finds

Companies that perform well financially do even better when they commit to a strategy that incorporates ESG.

Companies that commit to a focus on ESG, including creating green products and sustainable business practices, outperform their peers who do not make that commitment, according to a new report from McKinsey & Co. The result of the report speaks to fears among some business leaders who believe attaining sustainable and inclusive growth necessitates compromises and sacrifice of revenue and profit.

That assumption doesn’t always hold true, according to McKinsey’s report. “Our new analysis indicates financially successful companies that integrate environmental, social, and corporate governance (ESG) priorities into their growth strategies outperform their peers—provided they also outperform on the fundamentals,” the report stated. “The message is clear: not only can you do well while doing good – you can do better.”

As with any business strategy, ESG efforts must ultimately show up in financial performance. The report found that actively choosing to grow by adopting the right mindset, strategy and capabilities are key to success for business leaders. The report added: “If you can grow profitably as a sustainability leader, the market will reward you for this growth.

What Is ESG?

ESG stands for Environmental, Social, and Governance. It provides a framework to measure the sustainability and ethical impact of a company or investment. Investors, financial institutions and other stakeholders use ESG to evaluate companies. A growing number of investors consider ESG factors alongside traditional financial metrics to make more informed investment decisions.

The environmental aspect focuses on how a company manages the use of natural resources, energy consumption, pollution, waste management and carbon emissions, among other impacts to the environment such as deforestation and water conservation.

The social component assesses a company’s interactions with employees, customers, communities and society at large. It incorporates labor practices, employee relations, diversity and inclusion, human rights, product safety, customer satisfaction, community engagement and philanthropic initiatives.

Governance refers to the structure and practices of a company’s leadership and management. It involves company board composition, executive compensation, shareholder rights, transparency, accountability and business ethics.

Findings About ESG in New Report

The new report included an examination of 2,269 public companies, including financial performance and ESG ratings. McKinsey separated companies into industry outperformers and underperformers along the axes of revenue growth, economic profit and ESG scores.

They found that companies with improving ESG and sustainability scores achieved better growth and profitability than their peers. They also delivered 2% more in total shareholder return (TSR), which measures performance of stocks and shares over time, than other companies that also outperformed financially. Measured against all companies, these companies delivered 7% more in TSR.

These numbers suggest that “a strong ESG commitment adds additional shareholder value for companies that also exceed their peers in growth and profitability,” according to the report. However, the study found that committing to ESG does not compensate for poor financial performance.

“ESG is not a panacea—it won’t save an underperformer with a flawed strategy,” the report stated.

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