While there are numerous benefits of pursuing an ESG strategy, it’s important to note that there are also some downsides. A weak ESG proposition can drag productivity down, as in the case of strikes or worker slowdowns. These constraints may manifest both inside and outside the company. Productivity constraints can occur throughout the supply chain, as primary suppliers typically subcontract large orders or use purchasing agents. Because subcontractors are not often regulated, they may not have adequate oversight of the health and safety of their workers.
One important ESG strategy involves limiting the company’s exposure to controversial areas of business. This strategy seeks to minimize the company’s impact on the environment, and is also concerned with the company’s social and corporate governance practices. While it is difficult to filter by specific types of business exposure, many investors feel that companies with greater ESG concerns can create greater value for their investors. But how can investors go about determining which companies to invest in?
While ESG is important, it’s not enough to adopt it without integrating it into the company’s corporate strategy. Companies must demonstrate their value creation through hard metrics. For example, China’s imperative to address air pollution will create $3 trillion in new investment opportunities by 2030. Other investments that will benefit from ESG are in air-quality monitoring, indoor air purification, and cement mixing. For employees to get on board with such a strategy, companies must be able to show how these values align with their business model.
