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Navigating the Future: The real value of ESG in shaping business growth

Datum:17 april 2024
Traditional views often see ESG and GO as separate tracks on the journey to business success.
Traditional views often see ESG and GO as separate tracks on the journey to business success.

In the rapidly evolving world of business, companies are constantly seeking the golden formula for growth and sustainability. Amidst this quest, two powerful forces emerge as pivotal players: Environmental, Social, and Governance (ESG) practices and Growth Opportunities (GO). But how do these seemingly diverse strategies intertwine to carve out a firm's path to success? And more intriguingly, could the real secret to unlocking a company's future potential lie not just in what it does today, but in how it aligns its growth aspirations with responsible practices?

Our analysis delves into the relationship between ESG and a firm’s value creation, challenging the traditional view of these as separate paths. Traditional views often see ESG and GO as separate tracks on the journey to business success. However, we found that integrating ESG strategies could significantly enhance a firm’s GO portfolio. This finding prompts us to consider whether the focus on immediate growth overlooks the long-term benefits ESG practices offer. Consider Apple’s environmental initiatives or Unilever’s focus on social impact. These efforts don’t just improve their ESG standings; they also boost brand reputation, attract conscious consumers, and open new avenues for growth, showcasing ESG as a strategic lever for expansion.

The interplay between ESG performance and GO underlines a critical insight: ESG practices endow firms with a unique value proposition. Unlike tangible assets that competitors can mimic, ESG-driven intangible assets, such as reputational capital and employee satisfaction, offer a distinct competitive edge. These assets are especially potent in amplifying a firm's growth opportunities, illustrating why ESG practices are far more than just ethical checkboxes—they are strategic growth levers.

This brings us to an intriguing paradox: could the very strategies we often view in isolation actually be the dual engines propelling firms toward a sustainable, value-rich future? Our study suggests that both strategies can act as substitutes potentially leading to what we call subadditive value effects. This means that while both strategies aim to increase a firm’s value, overemphasizing one at the expense of the other might not yield the cumulative benefits one would expect. For instance, a company that invests heavily in ESG initiatives to the detriment of exploring new growth avenues might find that its overall value creation is less than if it had balanced its focus between ESG and GO. Similarly, a firm focused solely on aggressive expansion without integrating ESG principles might achieve short-term growth but could face long-term sustainability challenges, risking its reputation and stakeholder trust. This finding underscores the importance of strategic balance, suggesting that the most successful companies will be those that manage to weave ESG practices seamlessly into their growth strategies, thereby optimizing both without allowing one to overshadow the other. By recognizing the substitutive and counterbalancing nature of ESG and GO, firms can navigate a path to sustainable growth that does not just add value in the short term but multiplies it in the long run.

The revelation that ESG and GO can be substitutive, yet potentially lead to subadditive effects if not properly balanced, serves as a crucial insight for today's business leaders. It highlights the importance of not viewing ESG initiatives as mere add-ons or checkboxes but as integral components of a company's core growth strategy. By doing so, businesses can avoid the trap of subadditive value and instead unlock the full potential of their ESG investments to fuel growth.

In conclusion, our study invites companies to reevaluate their strategic priorities, encouraging them to construct ESG considerations into the fabric of their growth plans. The journey towards integrating ESG and GO is not without its challenges, but as demonstrated by industry leaders like Apple, the rewards are well worth the effort. Companies that achieve this balance not only contribute to a more sustainable and equitable world but also position themselves as frontrunners in the race towards future success.

So, we return to the question that opened this dialogue: Could the real secret to unlocking a company's future potential lie in how it aligns its growth aspirations with responsible practices? Our research suggests a resounding yes. In the dynamic landscape of modern business, where consumer expectations and global challenges demand more from companies, those that embrace this integration will not only navigate the complexities of today but will thrive in the world of tomorrow.

Author: Margarita Ortiz – h.m.ortiz.almeyda rug.nl

Reference:

Fuente, G. de la, Ortiz, M., & Velasco, P. (2022). The value of a firm’s engagement in ESG practices: Are we looking at the right side? Long Range Planning, 55(4), 102143. https://doi.org/10.1016/J.LRP.2021.102143