The writer is CEO of sustainability advisory and technology company SpectrEco.

In some corners of the world, pushback against investing in environmental, social and governance (ESG) is growing. It has become politicised, compliance costs can be high and some query its link with shareholder value. Nonetheless, the value of sustainable assets under management (AUM) held by institutional investors continues to follow an upward trajectory. Latest figures from the Global Sustainable Investment Alliance show that sustainable AUM globally hit $30.3tn at the end of 2022. According to forecasts by consultancy PwC, sustainable investments will double in the US and rise by 53% in Europe by 2026. Despite the naysayers, the global shift towards aligning business practices with sustainable goals will continue.  

For companies, the journey towards ESG compliance demands continuous investments encompassing audits, training, technology integration, supplier engagement, certification and monitoring. These are substantial commitments, and raise the question whether ESG compliance should be perceived as a cost or investment. But there are three key business reasons why firms must view it as the latter.

The bottom line

First, regulations and penalties for neglecting ESG practices are growing. There has been a 155% surge in the number of ESG regulations globally over the past decade, according to data provider ESG Book. Prime examples include the UK’s Sustainability Disclosure Requirements regime which addresses greenwashing, the EU’s Corporate Sustainability Reporting Directive which expands non-financial reporting obligations for large listed entities, Germany’s Supply Chain Due Diligence Act and the US’s recently-adopted (albeit watered down) climate disclosure rules regarding corporate carbon emissions. 

Second, ESG practices are driving capital attraction. Bolstered by strong advocacy from the world’s biggest asset managers Vanguard and BlackRock, and some 3000 investors embracing the UN Principles of Responsible Investment, strategic ESG development is now an imperative for companies. Weak ESG scores risk being excluded from critical capital streams. 

Third, ESG practices directly affect reputation and brand value. A 2023 survey of 23,000 global consumers by consultancy Bain & Company revealed that people are willing to pay on average a 12% premium for products with minimised environmental impact. Similarly, recent research by Boston Consulting Group found that firms with strong ESG reputations experience heightened customer satisfaction, market access and talent acquisition. This underscores the urgency for companies to align ESG practices with brand identity and values to meet evolving consumer preferences, lest they face severe consequences in today’s fiercely competitive market.

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The Nordic model

In the post-Covid era, ESG considerations have become pivotal in shaping not only portfolio investment, but also greenfield foreign direct investment (FDI). This is epitomised by the concept of the Nordic model, with Finland and Sweden in particular being heralded for their green transformation and commitment to ESG principles. Along with Denmark and Norway, all four countries score highly in the World Economic Forum’s latest Global Competitiveness Report in areas such as education, skills investment and innovation. They embody the triple helix model of co-operation among politics, industry and academia, which is crucial for driving sustainable development. Finland and Sweden’s agile governance and industry collaboration are central to adapting public administration and legislation to the evolving landscape of innovation and sustainability. This multifaceted approach not only positions them as ESG leaders, but also underscores the intrinsic link between innovation, governance and economic competitiveness. Its impact on FDI is borne out by the data. Greenfield investment monitor fDi Markets shows that growth in FDI into the four Nordic countries since 2010 when sustainable investing started hitting the mainstream has significantly outpaced the global average. 

Irresistible investments

ESG compliance isn’t a burden. It’s a powerful investment for nations eyeing FDI and capital inflows more broadly. High ESG scores make countries irresistible to investors seeking sustainable partnerships and long-term gains. By integrating ESG principles, nations boost competitiveness, fortify risk management, and instil unwavering investor trust. Beyond financial perks, ESG compliance fuels inclusive growth, environmental stewardship, and societal advancement, laying the groundwork for enduring prosperity. Embracing ESG isn’t just a choice, it’s the ultimate strategic move towards a brighter, more sustainable future. It’s time to seize the moment and lead the charge towards a world where sustainability isn’t an option, but a non-negotiable standard.

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