Report: Businesses That Perform Well in ESG Areas Reap Financial Benefits

Companies that outperform in industry-relevant environmental, social, and governance (ESG) areas boast higher valuation multiples and margins, all other factors being equal, than those with weaker performance in those areas, according to a new report by The Boston Consulting Group (BCG).

The report, titled Total Societal Impact: A New Lens for Strategy, comes as companies are being urged to pay greater attention to their overall role in society. In this environment, companies should factor what BCG calls total societal impact (TSI) into their corporate strategies.

TSI is the total benefit to society from a company's products, services, operations, core capabilities, and activities.

TSI is the aggregate of all the ways a company impacts society—and currently no single metric captures that. However, performance in important ESG areas is a good starting point for understanding a company’s TSI—providing a concrete way to assess the link between a company’s TSI and its financial performance.

The report examines companies in five industries: consumer packaged goods, biopharmaceuticals, oil and gas, retail and business banking, and technology. It assesses not only quantitative links between ESG performance and financials, but also identifies eight key success factors that can help companies improve both their societal impact and financial performance.

In each of the industries analyzed, top performers in specific ESG topics enjoyed valuation multiples that were 3% to 19% higher, all else being equal, than those of the median performers in those topics.

Top performers in certain ESG topics had margins that were up to 12.4 percentage points higher, all else being equal, than those of the median performers in those topics.

“Our analysis provides compelling evidence that companies can develop a robust strategy to make positive contributions to society with confidence that such an approach will increase enterprise value--not diminish it,” says BCG CEO Rich Lesser, a coauthor of the report.

The Case for Maximizing Total Societal Impact

BCG’s findings reflect the value of a focus on TSI. Companies that take actions to maximize positive societal impact can  reduce the risk of significant negative events (such as manufacturing accidents) and open up powerful new opportunities. The opportunities include tapping into new markets, cutting costs by reducing waste, and building a more inclusive—and reliable—supply chain.

The areas that are linked to the biggest impact on valuations and margins differ by industry.

In consumer packaged goods, top performers in topics that protect against negative events or risks, such as implementing a food safety management program (what we call downside topics), boasted a valuation multiple premium of 11%, all else being equal, compared to median performers in those topics. Meanwhile, gross margins were 4.8 percentage points higher, all else being equal, for companies that were the top performers in socially responsible sourcing than for the median performers.

In biopharmaceuticals, top performers in downside topics such as conducting ethical human clinical trials had a valuation multiple premium of 12% compared to median performers. EBITDA margins were 8.2 percentage points higher, all else being equal, for the top performers in expanding access to drugs than for the median performers.

In oil and gas, top performers in downside topics such as avoiding and combating corruption had a 19% valuation multiple premium compared to median performers. EBITDA margins were 3.4 percentage points higher, all else being equal, for the top performers in maintaining process-oriented health and safety programs than for the median performers.

In retail and business banking, top performers in downside topics such as securing business and personal data had a 3% valuation multiple premium compared to median performers. Net income margins were 0.5 percentage points higher, all else being equal, for top performers in promoting financial inclusion and 3.4 percentage points higher for top performers in environmentally responsible sourcing.

“Our research provides an important compass for business leaders,” says Wendy Woods, a BCG senior partner, head of the firm’s Social Impact practice, and a coauthor of the report. “It allows CEOs in the four industries we studied to identify the specific areas where they can take actions that will boost both TSI and TSR. These findings illustrate that the best way for business to ensure growth and longevity is to meet some of the hardest challenges in society in a way that supports performance.”

The Key to Maximizing TSI

BCG’s research included extensive interviews with 200 people in more than 20 companies, dozens of investment professionals, and employees of international development organizations and NGOs.

Those interviews helped shed light on eight actions companies can take to maximize both TSI and TSR:

  • Choose a small and distinctive set of TSI themes: areas that are relevant to the company’s industry and in which it can have a meaningful, positive impact.
  • Develop a cohesive narrative so that employees, customers, and investors understand how TSI is part of the core business strategy and what financial and societal benefits the company expects to achieve.
  • Select a limited number of high-priority initiatives within each TSI area that are integrated with and driven by business units. Each initiative should be based on a solid, detailed business and societal case and designed to be scaled.
  • Build deep relationships with other organizations in order to create large-scale, high-impact initiatives.
  • Set clear goals for the societal benefits the company aims to create and measure performance against those goals.
  • Engage directly with key stakeholders--including employees, customers, and governments—on the societal issues that are important to them.
  • Communicate to investors the external impact of TSI activities as well as the effect on financial performance.
  • Ensure the TSI effort is supported by the right management structure, governance, and incentives.

“Companies need to execute in all eight areas,” says David Young, a BCG senior partner and coauthor of the report. “But governance and commitment at the top are particularly critical. The board and the CEO must be clear about the importance of maximizing TSI—and drive that effort deep into the organization.”

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