Last week, McKinsey published the results of a new study that does a pretty good job of explaining in simple terms what it means to “integrate ESG into the business” and how to actually see the financial value ESG initiatives create. The study, called “The triple play: Growth, profit, and sustainability” looked at “[Total shareholder returns] TSR, financial performance, and ESG ratings of 2,269 public companies, separating them into industry outperformers and underperformers along the axes of ESG scores, annualized revenue growth, and economic profit.” I found the study to be reasonable, accurate and surprisingly pragmatic. Really.
In my view, the most compelling statements are:
“… excelling at ESG does not compensate for poor growth and profitability. For example, growth and profit laggards that only outperformed on ESG measures underperformed peers by five percentage points of TSR. In other words, ESG is not a panacea—it won’t save an underperformer with a flawed strategy…
The timeless principles of shareholder value creation hold: ESG efforts ultimately have to show up in financial performance to create outsize returns. The importance of actively choosing to grow by adopting the right mindset, strategy, and capabilities also continues to be essential: If you can grow profitably as a sustainability leader, the market will reward you for this growth.”
Yes I’m biased about this, having beaten the drum for years about the need for ESG to be reflected in “the timeless principles of shareholder value creation” rather than one-off efforts that primarily target or emphasize capital markets (what I call “sprinkling ESG fairy dust on shares”). Readers know well my mantra of business fundamentals and the frequent chorus about that being a key theme of my book. Even so, it is nice to get validation from others – especially McKinsey. ESG leaders and staff should be seeking guidance on this and finding credible ways to do so more than ever, given the current pressure being place on ESG/DEI/sustainability.