How to judge the ROI of your sustainability efforts

Faced with pres­sure from cus­tomers, reg­u­la­tors, investors and employ­ees, many com­pa­nies have ramped up spend­ing on envi­ron­men­tal, social and gov­er­nance (ESG) projects. But as they work to inte­grate sus­tain­abil­i­ty into broad­er busi­ness strate­gies, finance chiefs must still show that the ini­tia­tives offer good val­ue for mon­ey.

This process might well be daunt­ing for those at the begin­ning of their ESG jour­neys, espe­cial­ly if the exer­cise sets alarm bells ring­ing about the C‑suite’s com­mit­ment to sus­tain­abil­i­ty. But accord­ing to James Stacey, a part­ner at sus­tain­abil­i­ty con­sul­tan­cy ERM, there’s no need to fret. Com­pa­nies sim­ply need to assess the return on invest­ment (ROI) of their ESG ini­tia­tives in the same way they would judge oth­er invest­ments that could impact their future finan­cial per­for­mance and suc­cess.

“Under­stand­ing ROI is real­ly all about under­stand­ing how the sus­tain­abil­i­ty agen­da or a sub­set of it – let’s say car­bon emis­sions and the tran­si­tion to net zero – inter­acts with a business’s rev­enue, costs and the assets and lia­bil­i­ties it’s got on its bal­ance sheet,” he says. “At that lev­el, where these issues are strate­gic dri­vers of future finan­cial per­for­mance, the ROI exer­cise is real­ly the same as it is in oth­er busi­ness cir­cum­stances.” 

But because dif­fer­ent ESG issues have dif­fer­ent degrees of finan­cial impact on dif­fer­ent types of busi­ness, there’s no one-size-fits-all approach when it comes to mea­sur­ing that ROI, Stacey says. “Some­thing like car­bon emis­sions and cli­mate change will be all-per­va­sive, where­as some oth­er sus­tain­abil­i­ty issues can have equal­ly sig­nif­i­cant mate­r­i­al impact but will often be more spe­cif­ic to a sec­tor or geo­graph­i­cal con­text, rather than affect­ing all indus­tries in a sig­nif­i­cant way,” he says.

Intangible sources of value

The ROI might not always be pure­ly finan­cial. For instance, as employ­ees become more engaged on ESG top­ics, they are more like­ly to leave their jobs if they feel their employ­ers’ val­ues are not aligned with their own, mean­ing that part of the val­ue of any ESG ini­tia­tive lies in the ben­e­fits it pro­vides through staff reten­tion. 

“A big dri­ver of our posi­tion­ing on ESG is our peo­ple, and that’s an unquan­tifi­able ROI,” says Tam­sin Ash­more, CFO at Ulti­ma Busi­ness Solu­tions, an IT ser­vices com­pa­ny. “There’s a sig­nif­i­cant expec­ta­tion across all of our employ­ees that we as a busi­ness are doing the right things. For me, there’s an ele­ment around this that is based on attrac­tion and reten­tion. We are a busi­ness with excep­tion­al­ly low attri­tion, and that has an inad­ver­tent P&L impact because the cost of rehir­ing peo­ple is sig­nif­i­cant.”

The growth of sus­tain­abil­i­ty reg­u­la­tions over the past decade means that the ROI of an ESG ini­tia­tive could be as sim­ple as main­tain­ing your licence to oper­ate, says Jaideep Das, a part­ner at ERM. 

Take a busi­ness that has an out­size impact on a local com­mu­ni­ty in a region that suf­fers from water scarci­ty, for instance. “If you’re oper­at­ing a very water-inten­sive oper­a­tion, you might be cre­at­ing a lot of jobs but it’s going to have an impact on the community’s abil­i­ty to draw on water resources,” says Das. “There have been very good, well-run plants which have been stopped from oper­at­ing either by reg­u­la­tors or by com­mu­ni­ties because of issues like that. So while there might not be a dol­lar ben­e­fit of track­ing broad­er stake­hold­er engage­ment, it total­ly impacts their licence to oper­ate.”

There are oth­er non-finan­cial ele­ments of ROI that should be con­sid­ered, such as the organisation’s abil­i­ty to access fund­ing now that lenders and investors are increas­ing­ly scru­ti­n­is­ing ESG per­for­mance. “If you have a busi­ness that wants to bor­row mon­ey or is seek­ing invest­ment, if you can’t quan­ti­fy your ESG impact or sus­tain­abil­i­ty per­for­mance, then it becomes dif­fi­cult to access cap­i­tal and that means your growth becomes stunt­ed or you can’t achieve your busi­ness ambi­tions,” says Daniel Usi­foh, co-founder of Axiom, an ESG report­ing soft­ware provider.

What’s your reputation worth?

Oth­er ESG issues might not have a direct finan­cial impact, but could affect a company’s brand rep­u­ta­tion, impact­ing its abil­i­ty to grow and attract new cus­tomers. “There is a busi­ness case for being robust and dili­gent around con­duct and per­for­mance across those less direct­ly finan­cial­ly impact­ful KPIs [key per­for­mance indi­ca­tors] that don’t have an imme­di­ate and obvi­ous impact on rev­enue or cost,” says Stacey.

Of course, some sus­tain­abil­i­ty ini­tia­tives can have a direct finan­cial ROI, even increas­ing a company’s com­pet­i­tive advan­tage and boost­ing top-line growth. Das points to busi­ness-to-busi­ness (B2B) com­pa­nies. “In the sup­ply chains of cus­tomers with ambi­tious ESG goals, these com­pa­nies are increas­ing­ly get­ting select­ed because their prod­ucts and ser­vices will help their cus­tomers to reduce their car­bon foot­print or meet cer­tain tar­gets for the ‘S’ part of ESG.”

Ulti­ma, for instance, has a tar­get that 75% of its prod­ucts should help cus­tomers reduce their car­bon foot­print. In that instance, the finan­cial ROI is straight­for­ward: if cus­tomers are choos­ing to buy its prod­ucts, it feeds through to rev­enue and the company’s bot­tom line.

Efforts to reduce car­bon emis­sions can also help deliv­er a direct finan­cial ben­e­fit, either by reduc­ing busi­ness trav­el expens­es or low­er­ing elec­tric­i­ty costs. “What dri­ves both emis­sions and costs with­in your inter­nal oper­a­tions is ener­gy con­sump­tion, so if you’re able to reduce ener­gy con­sump­tion through your ESG ini­tia­tives, then it fol­lows that your oper­a­tional cost reduces as well,” says Usi­foh.

An accountant’s nightmare

Of course, CFOs might not be able to point to such fac­tors on a bal­ance sheet, says Ultima’s Ash­more. “It’s all in those hid­den areas of the P&L, so you wouldn’t be able to direct­ly attribute it to ESG,” she explains.

It can also some­times be chal­leng­ing to access reli­able data to track progress made on ESG ini­tia­tives and how that trans­lates into ROI. “As an accoun­tant, you want every­thing to be real­ly black and white and real­ly clear, but we’re still very much in a world where the robust­ness of report­ing is not com­plete­ly iron­clad,” she con­tin­ues.

That is cre­at­ing a back­drop where organ­i­sa­tions can poten­tial­ly mas­sage their ESG fig­ures and make their ROI look bet­ter than it is. “Every­one can show them­selves in the best light that they choose to at the moment, and there’s an ele­ment to ESG around how good is the mar­ket­ing firm that is doing all of this for you,” says Ash­more. “We’ve got to get under the hood of this, and that can only be done through reg­u­la­tion, oth­er­wise you’re rely­ing on organ­i­sa­tions to just be pas­sion­ate about what they’re doing.”

Ulti­mate­ly, if organ­i­sa­tions can’t accu­rate­ly mea­sure the impact of their sus­tain­abil­i­ty ini­tia­tives – be it for assess­ing ROI or meet­ing stricter reg­u­la­to­ry require­ments – the poten­tial impli­ca­tions could be severe. “This is no longer just a nice to have,” says Usi­foh. “Mea­sur­ing ESG’s finan­cial per­for­mance is a must if you want to remain in busi­ness in the long run.” 

Faced with pressure from customers, regulators, investors and employees, many companies have ramped up spending on environmental, social and governance (ESG) projects. But as they work to integrate sustainability into broader business strategies, finance chiefs must still show that the initiatives offer good value for money.

This process might well be daunting for those at the beginning of their ESG journeys, especially if the exercise sets alarm bells ringing about the C-suite’s commitment to sustainability. But according to James Stacey, a partner at sustainability consultancy ERM, there’s no need to fret. Companies simply need to assess the return on investment (ROI) of their ESG initiatives in the same way they would judge other investments that could impact their future financial performance and success.

“Understanding ROI is really all about understanding how the sustainability agenda or a subset of it – let’s say carbon emissions and the transition to net zero – interacts with a business’s revenue, costs and the assets and liabilities it’s got on its balance sheet,” he says. “At that level, where these issues are strategic drivers of future financial performance, the ROI exercise is really the same as it is in other business circumstances.”