Integrating environmental, social, and governance ideals into business is now more controversial than ever. Critics dismiss ESG as a woke pastime while they advocate for maximising business returns, implying that these are opposing objectives. Wrongfully so, as businesses can leverage sustainability opportunities to gain a competitive edge and outperform competitors in the long term.
ESG seems to be losing momentum, but global market forces continue to shift towards more sustainable business
Incorporating environmental, social and governance (ESG) considerations into business decisions is increasingly politicised. With Donald J. Trump’s return to the White House, the rise of an “anti-woke” movement, and anti-ESG laws being enacted in several republican US states, the ESG trend is facing headwinds. In US financial markets, the number of sustainable funds has been decreasing for five quarters in a row. Also in Europe, ESG funds were closing and rebranding en masse in 2024[1]. In business, a similar loss of momentum can be seen. Unilever, once the poster child of sustainable and ethical business practices, scaled back its environmental and social pledges in 2024[2]. Banks and energy companies are watering down their commitments too, with major banks leaving the global climate alliance for banks[3], and Shell weakening its 2030 emissions intensity targets. So, was ESG just “a fad”, as the main character of Industry, a popular tv show, suggests?[4]
We disagree. Although perhaps facing a temporary popularity crisis, sustainability is an increasingly crucial factor in global markets. Driven by increasing visibility of the consequences of climate change – 2024 was the year ever recorded[5,6] – the long term trend is that consumers, NGOs and policy makers are more and more expecting businesses to act sustainably.
- Consumers, among whom millennials and Gen Z will soon be the largest group, increasingly put their trust in brands that make good on their sustainability promises, the Harvard Business Review reports[7].
- NGOs are not just “making noise”, they are in fact making real impact by influencing companies to act more responsibly and to correctly report ESG impacts[8].
- Sustainability regulations, although developing at a varying pace globally, are gradually getting stricter. In Europe, new rules on corporate sustainability reporting were recently introduced, and a more stringent deforestation regulation is set for 2026.[9,10]
Due to these continuing market trends, sustainability will be an ever-increasing success factor for organisations to survive, compete and thrive in the long term
Organisations can and should leverage sustainability to stay ahead of competition
Apart from any potential benevolent motives, organisations must future-proof their business practices to stay ahead of their competitors. Sustainability enables organisations to gain a competitive edge in at least four ways:
- Operational efficiency: sustainability often goes hand in hand with operational efficiency, e.g. in energy efficiency, waste reduction, and logistics optimisation practices such as advanced vehicle routing.
- Customer retention & acquisition: sustainability can help differentiate a brand from competitors, driving customer retention and acquisition. Customers are more loyal to brands they trust and share their morals, and may even act as promotors. Another potential contributor to a trusted brand is positive NGO engagement.
- Getting public incentives: aside from preventing penalties, complying with regulations will open access to incentives and funding. Tax breaks, subsidies and grants are available to businesses that meet sustainability criteria. And investors are increasingly looking for ESG compliant investments. Even under mounting controversy, total global sustainable fund assets increased in 2024.
- Talent attraction & retention: a sustainable brand boosts talent attraction and retention. The generations that are now entering the workforce, in particular, find it important that their employer’s values align with theirs.
The challenge now is to translate ambitions into business decisions
“Businesses should embrace sustainability”, we’ve all heard that before. But what does that actually mean, in practice? That depends. It depends on your sector, strategy, customers, and organisation. Moreover, it is likely that you and your management team have been working on the topic of sustainability frequently over the past years. You can consider this your sustainability journey. The action you should take now depends on the maturity stage your sustainability journey has reached. Based on our three-phased Assess Design Embed-approach, we have drafted a high-level path of action for your sustainability journey, or the continuation thereof.
In short, it starts with assessment of sustainability impact, risks, and effectiveness of existing initiatives. The biggest challenge is assessing upstream and downstream sustainability in the supply chain, referred to as scope 3. After formulating an ambition and setting a pathway, real business decisions are needed. Unfortunately, there is no silver bullet here. It will take hard work, intense internal and external collaboration, and increased investment in the short term. In the long term, however, these efforts will equip your organisation with a significant competitive edge.
Read more about our sustainability consulting services on https://www.argonandco.com/en/services/sustainability/
Sources:
- Morningstar: Global Sustainable Fund Flows: Q3 2024 in Review
- The Guardian: Unilever to scale back environmental and social pledges (https://www.theguardian.com/business/2024/apr/19/unilever-to-scale-back-environmental-and-social-pledges)
- Financial Times: Citi and BofA exit UN-backed global climate alliance for banks (https://www.ft.com/content/acaeff4c-175c-41a0-806b-e870f1f1f53d)
- Time magazine: Industry Season 3 Is a Searing Takedown of Socially Conscious Capitalism (https://time.com/7006538/industry-season-3-review/)
- United Nations: 2024 to become the hottest year on record (https://news.un.org/en/story/2024/12/1158621)
- Financial Times: Climate Tracker: keeping watch on extreme events around the world (https://www.ft.com/content/e15b170b-6483-4835-a277-5e9f53cef494)
- Harvard Business Review: Research Consumers Sustainability Demands are Rising (https://hbr.org/2023/09/research-consumers-sustainability-demands-are-rising)
- INSEAD Knowledge: How NGO Activism Can Move the Dial for Sustainability (https://knowledge.insead.edu/responsibility/how-ngo-activism-can-move-dial-sustainability)
- European Commission: Corporate Sustainability Reporting (https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en)
- European Parliament: EU Deforestation Law: Parliament wants to give companies one more year to comply (https://www.europarl.europa.eu/news/en/press-room/20241111IPR25340/eu-deforestation-law-parliament-wants-to-give-companies-one-more-year-to-comply)
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