Environmental, social and governance (ESG) activities, regarding sustainability, diversity and employee satisfaction, correlate with stronger financial profitability and growth for private companies, revealed a new study.
The joint study from Bain & Company and EcoVadis, titled Do ESG Efforts Create Value?, assessed how ESG activities and outcomes have impacted 100,000 companies, 80% of which are private, and provides new insights into the advantages of ESG performance for private companies and underlines the imperative for private equity firms to factor ESG into their approach.
The research examined how various aspects of ESG activities revealed in EcoVadis scorecards —including implementing practices to reduce carbon and improve DEI, embedding sustainability into management processes and procuring sustainably — correlate with both ESG outcomes and financial performance. The findings show that, in addition to benefiting the planet and society, ESG activities are associated with both stronger revenue growth and higher EBITDA (earnings before interest, taxes, depreciation and amortisation) margins.
ESG & BUSINESS RESULTS
The study revealed four key correlations between ESG activities and business results:
1. Companies with more women on the executive team have better financial results. Companies that rank in the top 25% of their industry for executive team gender diversity have annual revenue growth approximately two percentage points above that of companies in the bottom quartile. And their EBITDA profit margins are three percentage points higher than that same group.
2. Companies that focus on ethics, environmental and labour practices within their supply chains are more profitable. These companies have margins three to four percentage points above those that don’t focus on their suppliers’ ESG credentials.
3. ESG leaders have higher employee satisfaction; companies with the most satisfied employees grow faster and are more profitable. They have three-year revenue growth up to five percentage points above those with less-satisfied employees and margins as much as six percentage points higher than those laggards. Beyond the basics of fair pay and ensuring a safe work environment, benefits may include career training, mental and physical healthcare, childcare, and educational opportunities, all of which boost employee satisfaction and, as a result, productivity and retention.
4. Renewable energy usage correlates with higher EBITDA margins in carbon-intensive industries. In the natural resources, transportation and industrial goods sectors, companies that use more renewable energy have higher EBITDA margins.
ACCELERATING THE SUSTAINABILITY JOURNEY
These findings emphasise the opportunities for private companies to improve their ESG efforts, which currently lag those of public companies. Only 35% of large private companies achieve top scores for carbon management, compared to 53% of large public companies, the research found.
“These findings should motivate companies at all levels of ESG maturity to redouble their investment in accelerating their sustainability journey,” said Sylvain Guyoton, Chief Ratings Officer at EcoVadis. “For companies in nascent stages, this means developing sustainability management systems with policies, action plans and reporting. Companies at mature stages can pursue more advanced capabilities such as regenerative resource management and product circularity. Ultimately, cascading these practices into their value chains can support, for example, Scope 3 decarbonisation and circularity initiatives, and also puts those trading partners on the same path to value creation. Our research shows this hard work will be well worth it.”
“Our findings provide much-needed perspective in the debate as to whether ESG activities correlate with financial performance,” said Axel Seemann, Advisory Partner at Bain & Company. “This new data shows that positive ESG outcomes are a trait of successful companies. This should encourage private companies and investors to confidently double down on ESG efforts. We only expect this correlation to strengthen as ESG data becomes richer and more nuanced.”
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