Molly Podolefsky is a director in Guidehouse’s Energy, Sustainability, and Infrastructure segment in Boulder, Colorado.
Environmental, social and governance has traditionally been viewed as a way for firms to mitigate risk and demonstrate compliance with sustainability best practices. From that perspective, ESG reporting and disclosure provides a structured approach to mitigating climate-related risks, helping food and beverage firms avoid being caught unprepared for and unable to adapt to social and environmental change.
ESG’s primary benefit in the era of decarbonization and social transformation, however, is not in risk mitigation, but in its role as a value creation tool. In the words of Blackrock CEO Larry Fink in his 2021 letter to CEOs, "We know that climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity."
A recent white paper from Guidehouse describes the characteristics of firms that will flourish in a carbon-free future: agility, circularity, connectedness, transparency, operational efficiency, resilience and social equity. Although each of these pillars has a bearing on sustainability, transparency best defines ESG and explains its ability to unlock value for CPG companies.
By disclosing risks in a transparent manner, firms that leverage ESG gain the trust and loyalty of customers, employees and investors who only want to invest time and money in alignment with their values. Three channels define the ESG value proposition:
- Increased revenue through ESG-conscious customers
- Increased investment flows from sustainable funds
- The ability to recruit and retain top talent
Food and beverage companies feel the impacts of their sustainability successes and failures most immediately in terms of revenue. Consumers today are increasingly brand-conscious, and social media platforms, apps and online news put information about companies’ sustainability at their fingertips. More people expect brands to mirror their values, demonstrating commitments to environmental and social sustainability to earn their loyalty.
CPG companies that harness ESG to green their operations and their image are rewarded with increased revenue driven by socially and environmentally conscious buyers. Those that ignore ESG as a value creation tool forego revenue streams tied to doing good. A large- scale study of CPG purchases by NYU’s Stern Center for Sustainable Business found 50% of CPG growth between 2013 and 2018 was driven by sustainability-marketed products.
Investors in today’s market look more like consumers in this respect. They come with the added sophistication of software tools and platforms that allow them to discern sustainable value and to group assets by the impact they have on categories of environmental and social good they value most — gender equity, economic development, biodiversity, fair trade and climate change, among others. Without disclosure in alignment with major ESG frameworks, CPG companies will fail to meet threshold criteria for inclusion in funds that increasingly require sustainability. CPG companies could also face pressure from activist investors, particularly through proxy voting. The share of proxy resolutions focused on environmental and social sustainability grew from under a third in 2006 to over 50% in 2017.
By harnessing ESG reporting and disclosure to signal sustainable value, CPG firms can unlock investment opportunities through a host of green asset managers and funds, while proactively managing activist investor risk. ESG funds more than doubled in 2020, capturing over $50 billion in net new investment dollars and often outperforming the S&P 500.
Just as ESG can make a company appear more valuable to investors, it can also make it more attractive to future employees. A recent study even found that three-quarters of millennial respondents would accept a smaller salary to work for a sustainable firm, and more than 10% of respondents said they would take a $5,000 to $10,000 pay cut. As with customers, today’s workers have easy access to information about their prospective employers’ sustainability and can use that information to screen and prioritize offers. Through investments in engagement, diversity and inclusion, CPG firms can also signal their commitments to ESG while attracting and retaining world-class talent.
Ultimately, ESG offers several value streams. Investors, acting out of self-interest, will reward sustainable firms for lowering risk with increased investment flows. Revenue streams from environmentally and socially conscious buyers will increasingly tie profitability to sustainability. Perhaps the most profound effect of ESG will be to differentiate socially and environmentally sustainable firms in the talent market, where green investment yields a strong, stable and talented workforce. Food and beverage companies embracing change in a sustainable manner will capture the benefits of this green revolution, securing significant ROI and ensuring their long-term success.