You have likely noticed the green boom in business of late. From the aisles of supermarkets to the proclamations of major corporations, things are getting leafy and verdant.

In 2020, Nestlé’s chief marketing officer said that sustainability was “a trend that will intensify as companies seek to meet evolving consumer expectations on sustainability.” He was not wrong.

Companies nowadays are keen to tout their sustainable credentials, but doing so goes deeper than hopping onto a trend. Investment funds, traditionally the most profit-driven of human enterprises, today manage ESG-guided funds boasting more than USD$7.7trn in assets. The Financial Times continues to report that “corporate strategies that take sustainability into account can boost financial performance.”

There are operational benefits to sustainable practice, too. Reducing resources, streamlining production, optimising efficiency, and utilising recycled materials can all reduce costs. Customers are also more likely to be loyal if a company is sustainable. A recent McKinsey report found that “consumers care about sustainability—and back it up with their wallets.”

Despite this, however, there is a backlash against environmental, social and governance (ESG) initiatives happening right now. Whilst going green can drive business growth, profit as the champion business motivator has returned, and money is being pulled out of ESG-labelled funds as external factors such make the process of financing and running a business increasingly difficult.

Financial media is debating whether ESG is dead. But it still matters, deeply, whether business is good for the planet.

So, is this anti-ESG backlash motivated by planet, or profit? We have looked to the experts and found seven good reasons why sustainability is good for business.

1) Pursuing Green Innovations Boosts Competitiveness

Research has found a strong correlation between the pursuit of green innovation strategies and companies boosting their competitiveness.

Dr Bettina Becker, of Durham University Business School, found that the pursuit of green innovation strategies increases a company’s innovation success rate when compared with companies that don’t adopt such practices. The study finds that exploring green avenues boosts a company’s competitiveness by allowing them to enter new markets and build up new capabilities. Companies which follow green innovation strategies see a 3-4% increase in turnover due to the launch of new-to-market products.

2) CEOs With Compensation Linked To ESG Targets Act More Sustainably

ESG concerns have become embedded in corporate structures. From Blackrock CEO Larry Fink’s famous pro-ESG bent to CEO compensation being linked, controversially, to hitting ESG targets. But do ESG pay-incentives make companies more sustainable, or are they a way to help the public swallow the bitter pill of gargantuan paycheques?

Stefan J. Reichelstein, professor emeritus at Stanford Graduate School of Business, along with fellow researchers, investigated the pros and cons of linking CEO compensation to ESG targets.

They found that the number of companies that designate ESG metrics as key performance indicators for executives grew from just 3% in 2010 to a whopping 38% in 2021.

Whilst ESG pay has its critics who say that it is purely a PR exercise with little demonstrable benefit, Reichelstein’s study found that ESG pay does help companies achieve ESG targets.

“When firms include emission-specific metrics in their executive compensation packages, they also achieve a subsequent decrease in their CO2 emissions,” the researchers write.

There is also no evidence, the researchers say, that ESG pay has a negative effect on companies’ financial performance or share price. ESG pay, then, can help save the planet without sacrificing profit. Even critics will have to admit, this is pretty good deal.

3) Companies That Invest In Sustainability Become More Resilient

New research from Vlerick Business School has found that when a medium-sized enterprise invests in becoming more sustainable, its overall resilience increases.

Whilst the focus might linger on multinational and large-scale firms, sustainability transition is unachievable without the green efforts of SMEs – which now constitute more than 60% of value-added in Europe. Small business drives the U.S. economy, employs nearly half of the entire American workforce, and represents 43.5% of U.S. GDP.

But, smaller companies can also find adopting and investing in ESG practices a riskier, more unpredictable undertaking. To explore this, Professor David Veredas and Dimitrios Kolokas, both at the Centre for Sustainable Finance at Vlerick Business School, studied the impact of ESG performance on the credit risk of 350 SMEs as a measure of resilience, and found that when SMEs become more credit-worthy the more that they invest in sustainability.

In fact, an 11% increase in an SME’s ESG performance will decrease its credit risk by 3.5%.

4) Consumers Are More Forgiving If Faulty Products Are Environmentally Friendly

Research has found that consumers react less negatively to the failure of a product if it is billed as sustainable, when compared with a conventional product.

Rising concern over the climate crisis has created changes in consumer behaviour and, increasingly, consumer’s trust in products billed as sustainable. Interestingly, if one adds a dash of sustainability to a product people, as a rule, are more likely to treat any malfunctions with more tolerance.

Across empirical field analysis and controlled experiments, Dr Anshu Suri, of University College Dublin’s College of Business and Dr Ali Tezer, of HEC Montréal, investigated what happens when sustainable products fail or don’t live up to expectations. This included analysing consumer ratings on Amazon.com, consumer willingness to write negative reviews, and consumer preference for refunds over replacements.

They found that consumers want to help others avoid a bad experience while also supporting environmentally friendly products. This conflict leads to consumers reacting less negatively to the failure of green products than conventional ones.

“Consumers don’t overlook shortcomings of green products, but they are more forgiving, perceiving their restraint from negative feedback as a form of support for the environment,” says Dr Suri. “By not reacting negatively to green product failures, consumers believe they are being more prosocial, as negative reaction may harm the success of a product that benefits the environment and society.”

5) Pursuing Sustainability Can Create Shared Value

Traditional business models aim to create value for shareholders, often at the expense of society and the environment. Sustainable business practices redefine business, showing that a company can contribute positively to the wider world while simultaneously succeeding.

In an influential piece, Harvard Business School professors Mark R. Kramer and Michael E. Porter go a step further, and propose the idea of creating “Shared Value” as a sustainable growth model that balances financial gain with corporate responsibility.

Creating Shared Value (CSV) is a framework for a company to create economic value while, at the same time, addressing societal problems and challenges. CSV matches successful business practices with ESG priorities.

It has been described as “a breakthrough in redirecting the debate on the purpose of business” and is a predecessor to ESG.

When companies align themselves with the desires of stakeholders (such as to not be destroyed by a climate-change-caused fiery apocalypse) they reduce conflict and boost cooperation – both drivers of business success. When fair trade is practiced by a company and everyone labouring at each level of the production process is fairly compensated, there is less chance of corporate scandal, boycotting, and consumer disinvestment in products and services occurring.

As the study authors wrote, stakeholder engagement “is not just corporate social responsibility but enlightened self-interest”.

6) Employees Are More Charitable If Their Employer Is Environmentally Conscious

Employees are more likely to make donations and willingly volunteer outside of work if their employers engage in environmentally conscious activities, research has found.

Dr Irmela Koch-Bayram and Prof Torsten Biemann, of Mannheim Business School, conducted three experiments to investigate whether the sustainable behaviour of a company (or lack of) affects the behaviour of its employees.

They found that if a company behaves with sustainability in mind, their employees will increase donations to charities, and engage more readily in other prosocial behaviour. Companies engaging in pollution, or other harmful activities, on the other hand, reduce the chances of their employees being willing to engage in prosocial behaviour.

“Companies not only contribute to environmental protection and harm through their own activities but also contribute to environmental issues by influencing employee behaviour,” says Dr. Koch-Bayram. “The positive effects of pro-environmental activity are partly explained by the strengthening of employees’ environmental self-identity.”

Environmental self-identity is the perception individuals have of themselves in relation to the environment. Those with a strong environmental self-identity tend to actively engage in environmentally friendly behaviours such as recycling and reducing waste.

The researchers also recorded the environmental guilt of employees. If an employer engaged in activities harmful to the environment, employees exhibited increased feelings of guilt. If an employer acted sustainably, then guilt was lessened.

The researchers conclude that organisations have an ethical responsibility toward the environment and their employees, and therefore politicians and legislators must also set boundaries and regulations that ensure organisations do not negatively impact the environment, to ensure the influence on employee behaviour is positive, so that business positively affects the world.

7) Listening To Stakeholders Can Help Future-Proof A Business

Jason Jay, director of the MIT Sloan Sustainability Initiative, and senior lecturer at the MIT Sloan School of Management, has articulated why business should listen to external as well as internal stakeholders, and how this can lead to strong decision-making, better-implemented sustainability measures and business resilience.

An “outside-in” listening approach means listening to the concerns and demands of all stakeholders. By constantly listening to these parties and taking their concerns and demands seriously, companies gain information on how to react to the market. Doing this, Jay says, help to future-proof their businesses by enabling them to guard against sustainability shocks and PR disasters. It also allows companies to identify and shape their response to new sustainability issues as they emerge.

Jay uses McDonalds as an example. Taken to task by Greenpeace when it was uncovered that McDonalds was using soybean products grown on deforested land that was once the Amazon rainforest, McDonalds listened to concerns and onboarded advice. McDonalds then partnered with Greenpeace to remove soy products which contributed to environmental catastrophe from its supply chain.

The “outside-in” approach allows companies to practice introspection and make positive changes that align with sustainable goals – taking the time to step back, learn, and then better articulate what kind mark they want to leave on an ever-changing world.

Learning, understanding, and defining a company’s social mission illuminates the issues on which it wants to act. Good examples can be found in “any of the purpose-driven companies that have been mainstays of the B-Corp movement,” Jay says.

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