Article written by Marina Mattera
Master in Global Corporate Gompliance candidate (LL.M./MsL) at IE Law School. PhD, PMP, MSc, International Consultant
A change of paradigm in corporate strategy
In recent years, corporations have begun moving from a profit and market value base to an approach based more on making a contribution to society. Firms that were considered to be of high ‘value’ in terms of market capitalization have failed to provide the services and products required to meet the demands of each segment. In part, this is because they did not see the shifts in consumer choices and requirements and how requests regarding product and service design had changed to now include other elements. As a result, they have seen their profits fall sharply, with consumers moving to less well-known brands in some cases, while in others companies have simply ceased to exist.
Today’s consumers not only want to satisfy their needs, wants or demands, but want to buy from companies that will provide products and services while also making a positive impact on society and the environment. In addition, several scandals involving firms acting unethically, together with greater availability of information through the internet, have put companies under increasing scrutiny.
Creating value through a commitment to ESG
As a result of this process, businesses are finding that by including in their strategic design the provision of services and products that not only contribute to profits, but that also balance people and planet have found a recipe for success. Innovation that aligns the three Ps (people, profit and planet) can contribute to greater productive efficiency, reduced costs, improved performance, increased brand awareness and a better corporate reputation. All of these elements can translate into the value of the company and thus its market capitalization, improvement of brand image and corporate reputation. This is known as the Triple Bottom Line (TBL) theory whereby businesses base their strategic development on balancing the three Ps. Furthermore, in recent years investors have also been increasingly demanding to know companies’ social responsibility strategies and their social and environmental impact.
In short, environmental, social and corporate Governance (ESG) have become critical in the design of corporate strategies that are efficient and can support business development in the short term as well as in the long term. Recognizing the importance of ESG, many firms have consistently incorporated environmental and social policies into their strategic design, as well as adequate governance policies and procedures to ensure their organization can thrive. Since 2000, multiple initiatives have been created, such as the United Nations Global Compact, which outlines 10 principles that can help organizations adequately plan, while respecting people and the planet, and at the same time, implement anti-corruption practices. Others such as the Global Reporting Initiative created standards for information disclosure to encourage firms and other organizations to increase their transparency and accountability.
Many organizations, including SMEs, large multinationals, NGOs and others have adhered to and learned from these initiatives, as well as involving themselves in the construction of a solid knowledge base. Through their experience, they have been able to improve their internal management, increase their product and service design adaptability to the changes in consumer habits, while holding onto their competitive advantage.
Firms’ resilience and the Triple Bottom Line
This trend became even more evident when the COVID-19 pandemic struck the world. Most organizations had not designed contingency plans that included a potential global pandemic that would halt business operations and every-day life. This is particularly true in the case of Italy and Spain, the two nations where the pandemic hit first after spreading out of China, and where the economic impact has been worse than in other nations due to early and strict lockdowns.
In order to understand better the relationship between TBL and a firm’s financial performance, a sample of companies in the energy sector was evaluated during the first six months of the COVID-19 pandemic (January and June 2020). Through studying the IBEX-35 (Spain’s benchmark stock market index) and the MIB (Italy’s benchmark stock market index) some key findings were identified. The data shows that while all the companies included in each index were impacted by the lockdown measures and severe limitations on movement, consumption, production and daily-life, those that had been implementing ESG strategies and following the TBL several years prior performed significantly better than those that had not shown much commitment in this regard.
In addition, it was also shown how organizations involved in improving the welfare of people and aiding local, regional and national governments were able to reinforce their brand image and improve their reputation. Furthermore, their previous years of solid TBL strategic design and clear ESG commitment meant that many of their products and services had already been digitized and were adaptable and easily changed to meet the needs of the market, in line with balancing the three Ps. Therefore, the market continued to trust these firms and thus their market value saw an improved recovery, already in the first few months after the pandemic hit.
In conclusion, a solid commitment to TBL strategic design, along with the right environmental, social and corporate governance policies and procedures can significantly contribute to a firm’s ability to overcome a crisis. By riding the ESG wave, businesses can not only make a positive contribution to people and the planet, but also ensure that their profits continue to grow, as does their overall market value, while investors’ perceptions are positive.