ESG has become somewhat of a buzzword in recent years and for good reason –  Environmental, Social, and Governance (ESG) factors have gained significant importance in the FMCG and Food and Beverage Industries. But why is ESG vital to gaining a competitive advantage?

Sustainability is no longer an ideal, it is a mainstream concept and companies that prioritise this and other ESG factors are increasingly being perceived as more responsible, ethical, and sustainable. In the FMCG (Fast-Moving Consumer Goods) industry, a focus on ESG over traditional issues such as corporate strategy is emerging as both an ethical and commercial path to securing a competitive advantage in times of uncertainty.

Investors are increasingly assessing how companies behave as well as how they perform.

As investors and corporate boards assess the multitude of risks that could potentially impact their portfolios' returns such as; climate change, labour rights and political risk, how companies behave as well as how they perform is coming under increased scrutiny. Investors want to understand what a company's strategy is in these areas and whether it will provide them with an advantage over their peers or competitors. 

The result is a growing focus on ESG issues such as diversity and gender equality, employee health and safety, sustainability practices and climate risk management. This trend has been driven in part by regulatory changes such as ASIC’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Australia's insurance industry can expect an acceleration in climate risk reporting and sustainable finance obligations in 2023. In December, the federal government announced the start of a consultation process that would lead to mandatory climate-related disclosures.

But it's also happening because investors want to know that their money isn't funding unethical behaviour or activities with negative environmental consequences.

Investors want to understand how environmental and social risk is being managed.

ESG is about understanding how to manage environmental, social and governance risks. For board members and business leaders, it's about making sure that a company has good governance structures in place so that it can make decisions in the best interests of its stakeholders.

As we have seen in recent years, ESG factors are increasingly affecting company performance, but they also have the potential to significantly impact an organisation's reputation. In fact, investors are increasingly looking at ESG factors when making investment decisions--and this trend isn't likely to change anytime soon.

Corporate boards are increasingly being held accountable for ESG performance.

Economic pressures, talent shortages, digital transformation and shifting consumer expectations are all pressing issues for FMCG companies. Among the multitude of competing priorities, ESG issues don't seem like they would be at the top of the list.

However, research is finding that those who pay attention to ESG are actually finding themselves in a better position than those who don't. When it comes to ESG, McKinsey found that from 2,000 ESG studies on the impact of ESG on company returns, 68% of companies that prioritise environmental, social, and governance (ESG) concerns achieved positive returns. 

And when it comes to gender diversity on boards, another study by the University of California, Davis found that companies with higher female representation experienced lower costs and greater returns on capital during turbulent times.

How does ESG translate into a competitive advantage, especially in times of uncertainty?

Plagued with significant disruptions in recent years, including changing consumer preferences, increasing competition, and supply chain disruptions the FMCG industry has been hit hard.  These disruptions have highlighted the need for FMCG companies to adapt to changing circumstances and remain agile. 

One might argue that in light of such a challenging backdrop, rapid digital or business transformation may offer the greatest potential for organisations to secure a competitive advantage. Whilst the case for transformative or digital initiatives is indeed strong, factoring ESG into core business strategies can help organisations to better align products, services and business purpose with consumer and employee values, increasing their ability to meet stakeholder expectations. In doing so, FMCG companies can improve their ability to secure a competitive advantage by enabling them to respond to changing market conditions.

ESG can build greater resilience

As business leaders explore the ways in which they can mitigate risk, factoring ESG considerations into corporate strategy can help light the path to better decision-making. One of the key benefits of focusing on ESG is the ability to build resilience in the face of uncertainty. Through the lens of environmental sustainability and social responsibility, boards can better advise and support FMCG companies to build resilience by understanding how future risk can impact their organisation, thereby reducing their exposure to risks such as supply chain disruptions, regulatory changes, and reputational damage. 

Companies that prioritise sustainability by reducing their carbon footprint and implementing sustainable sourcing practices are less likely to face regulatory penalties and reputational damage. Similarly, companies that prioritise social responsibility by investing in their employees' well-being and safety are better equipped to deal with disruptions and the effects of unexpected events such as the COVID-19 pandemic, which highlighted the importance of employee safety and well-being. 

Research from Mercer shows that satisfied employees work harder, stay longer with employers, and seek to produce better results for the organisation. The same research found that companies with highly satisfied employees have, on average, 14% higher ESG scores than the global average.

ESG Improves stakeholder relationships

Secondly, ESG can be a powerful tool in helping FMCG companies build stronger relationships with customers and other stakeholders. A focus on ESG factors can help FMCG businesses to build stronger relationships with customers and other stakeholders. Customers are becoming increasingly concerned about the impact of their consumption on the environment and society. They prefer to buy products from brands that share their values and actively work towards sustainable and socially responsible practices. FMCG companies that prioritise ESG factors are seen as more ethical, sustainable, and trustworthy, which can help them build brand loyalty and customer trust.

This isn’t exclusive to customers, organisations that invest in ESG are more likely to attract and retain employees who share their values and are committed to creating positive social and environmental impact. 

Today's workforce is increasingly values-driven, and employees are more likely to work for companies that align with their values and offer a sense of purpose. By prioritising ESG factors, FMCG companies can attract and retain employees who are committed to creating positive social and environmental impact, and who are more likely to be engaged and motivated in their work. 

According to a survey conducted by SEEK in 2021, 79% of Australian workers want to work for a company that is committed to making a positive impact on the environment and society. The same survey found that 74% of respondents are more likely to apply for a job at a company that is environmentally and socially responsible, and 81% said they would consider leaving a company that didn't have a good reputation for corporate social responsibility.

ESG drives innovation and opportunity

Thirdly, a focus on ESG factors can lead to innovation and new business opportunities for FMCG businesses. FMCG companies that prioritise ESG factors are more likely to identify and capitalise on emerging market trends related to sustainability and social responsibility.

By prioritising sustainability, FMCG businesses are better positioned to develop products that are made from renewable materials or that are recyclable, enabling them to tap into emerging markets that promote health and wellness or address social issues such as poverty and inequality. 

Additionally, ESG factors are more likely to attract investment from impact investors, who are looking for companies that generate positive social and environmental impact in addition to financial returns. 

While some FMCG companies may be reluctant to prioritise ESG factors because of concerns they will harm profitability and competitiveness, research shows that companies that prioritise ESG outperform their peers in terms of financial performance and market valuation. A study by Harvard Business Review found that companies that prioritise sustainability outperformed their peers in terms of stock performance and financial performance. In addition, socially responsible investors are more likely to invest in companies that generate positive social and environmental impact.

Moreover, a focus on ESG factors can help FMCG companies to differentiate themselves from their competitors in a crowded market. In the FMCG industry, where competition is fierce, companies that prioritise ESG factors can stand out by offering products and services that are more sustainable, ethical, and socially responsible. This can help to build brand loyalty and customer trust, which can lead to increased sales and profitability.

In fact, ESG factors can be integrated into corporate strategy to create long-term value for the company and its stakeholders. Companies that prioritise ESG factors can use them as a lens to evaluate and inform corporate strategy, identify new business opportunities, and manage risk. 

Business leaders and executives can use sustainability metrics to evaluate the environmental impact of their operations, identify areas for improvement, and implement sustainable practices that reduce costs and increase efficiency. Similarly, companies can use social metrics to evaluate the impact of their operations on employees, customers, and communities, identify areas for improvement, and implement policies and practices that promote social responsibility.

In conclusion, a focus on ESG factors over traditional issues such as corporate strategy could be a competitive advantage for FMCG businesses in times of uncertainty. By prioritising ESG factors, FMCG companies can build resilience, strengthen stakeholder relationships, drive innovation, and differentiate themselves from their competitors. 

Moreover, a focus on ESG factors can lead to improved financial performance, market valuation, and talent attraction and retention. As the business world continues to evolve, FMCG companies that prioritise ESG factors are likely to be better equipped to adapt to changing circumstances and emerge as leaders in their industry.

At ELR Executive we have over 20 years of experience helping FMCG and Food and Beverage organisations identify and attract the right talent to help achieve better business outcomes. If you'd like to learn more about how we can help you hire the right leadership talent, who can help your organisation turn ESG into a competitive advantage, speak to us today.