ESG and profits - are they in conflict with each other?

We have officially been in what has felt like a new era in business over the past year. Capital has gotten more expensive with interest rates having risen around the world, and there is constant talk about companies ensuring solid paths to profitability if they aren’t there already. At a minimum, successful blue chip businesses are focusing their priorities on profitability. 

The shift seems to have moved away from a very prevalent discussion about ESG and impact towards maximizing profit and de-risking plans to ensure the continuance of businesses. So, the big question at the forefront of so many of our minds is: as we think about ESG objectives vs. profit objectives, are they opposites? Are they in direct conflict with each other or can they co-exist? And, in an ideal world, is there even a way for ESG objectives to contribute to driving profit? 

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When the company I founded (theomx.com) pivoted to focus purely on ESG objectives through its integration with Sustainalytics, I was surprised to learn that ESG ratings agencies essentially think about ESG as a way to measure a business’s overall risk. Each individual ratings agency has their own methodology, but tends to focus on measuring a company’s exposure to their industry-specific risk and how they manage it. 

So yes, a positive ESG rating of course tells a story about a business or supplier’s positive impact on the environment, but it also paints a much wider picture of how the company’s governance structure and overall systems are set up to ensure the sustainability of the whole team and its supply chains. And, while that sustainability includes the sustainability of the broader planet and environment, it’s also about that specific company’s ability to survive in the long term. 

It tells a story about the extra due diligence that the company has likely done to solidify the best partners and agreements for the long run, and how the company is thinking about the future throughout its decision making. That could possibly include having a diverse team with proper checks and balances in place. It could also include leveraging data and AI to flag potential problem suppliers / partners proactively and keep track of extensive due diligence of those suppliers or partners. 

In fact, one of the main reasons ESG ratings have become such a sought-after metric for investors is that in trying to measure just the “positive impact on the environment and society”, what they actually found was that there is a direct correlation with long-term profitability and sustainability, i.e., reduced risk across the broader business metrics of organizations. 

In other words, it’s clear that ESG (which includes diversity) metrics should not be considered in conflict with profit objectives.