The Power of ESG and Circular Economy in Driving Business Success
At our German American Circular Economy Event this June, we listened to experts from both sides of the Atlantic about new trends and developments in the circular economy and sustainability – and what still needs to be done in order to realize a greener future. From promising legislation to innovations in new materials, there’s a lot to be excited about, and a lot of progress to be made.
Transitioning from our traditional linear “take-make-dispose” model to a more circular way of production and consumption is an important element of not just a more sustainable, environmentally friendly way of doing business, but a more resilient way as well. When examining how one’s organization can be fit for the future, both economically and environmentally, ESG principles are becoming a more important aspect for every business to implement.
What does ESG mean?
ESG is a framework that encompasses environmental, social, and governance aspects. It serves to evaluate an organization’s practices and performance concerning sustainability and ethical matters. ESG is not limited or defined by your business’s product or services, although it might also result in a more sustainable, equitable product. It offers a structured approach to gauging business risks and identifying opportunities in these specific areas. Additionally, ESG provides a comprehensive framework to assess and track the organization’s progress in its commitment to sustainable and responsible practices.
The ESG framework comprises three essential components:
- The “E” stands for environmental factors, such as energy consumption, waste management, resource utilization, and their environmental impact. This element also includes considerations related to carbon emissions and climate change. Every company, regardless of its business model, utilizes energy and resources and consequently affects and is influenced by the environment.
- The “S” represents social criteria, encompassing aspects such as labor relations, diversity, and inclusion practices. It acknowledges that every company operates within a diverse and interconnected society.
- The “G” denotes governance, which pertains to the internal systems, practices, controls, and procedures adopted by a company to govern itself, make effective decisions, comply with legal requirements, and address the needs of external stakeholders.
Each ESG component is interconnected. Social criteria often intersect with both environmental considerations and governance practices when companies strive to comply with environmental regulations and address broader sustainability concerns.
While it is true that ESG has gained prominence through an investment lens, small and medium-sized businesses can also derive significant benefits from implementing ESG-aligned strategies. Embracing high ESG standards can reduce the risk profile of SMBs by fostering top-line growth and mitigating both operational and regulatory challenges they may face.
Whether viewed as a moral imperative or not, sustainability is frequently perceived as an expensive addition to a business model. However, societal, regulatory, and market forces are rapidly converging and driving the importance of sustainability as a catalyst for enterprise success and company value.
How you can benefit from ESG
- Win the talent war:
Your employees are your greatest asset and the competition for top talent is rife on both sides of the Atlantic. In the war for talent, a commitment to sustainability, diversity, and equity is a major differentiator. According to IBM’s Institute for Business Value (IBV) study, 68% of respondents would be more inclined to take a job at an environmentally sustainable company.
- Financial Savings:
Although prioritizing ethical considerations for people and the environment may entail certain costs, there are also numerous ways in which implementing sustainable practices can result in cost savings for businesses. Several examples of these practices include adopting energy efficiency measures to minimize energy consumption, procuring second-hand items, minimizing the use of raw materials in production and packaging, and reducing shipping costs by sourcing from local suppliers. By incorporating such sustainable approaches, businesses can not only contribute to a better world but also realize financial benefits through reduced expenses.
- Competitive Advantage:
Consumer awareness and concern for sustainability have grown significantly, resulting in a shift in their purchasing behavior. A recent study found that products in the US market that promote ESG-related claims experienced an average cumulative growth of 28 % over the five-year period from 2017 to 2022. In contrast, products without such claims recorded an average growth of 20%. This highlights the increasing importance consumers place on sustainability and their willingness to support products aligned with their values.
Within the B2B sector, organizations are now placing greater emphasis on evaluating the climate, human rights, and overall sustainability commitments of their vendors during the procurement process. This trend is expected to gain further momentum with the introduction of new regulations such as the German Supply Chain Due Diligence Act and the proposed Corporate Sustainability Due Diligence Directive by the EU. These regulations will hold enterprises accountable for ensuring the observance of human rights and environmental considerations throughout their operations and supply chains. This indicates a growing recognition of the need for responsible practices and demonstrates a commitment to sustainability across the business ecosystem. Back in March 2022, the Securities and Exchange Commission (SEC) of the United States unveiled its proposal for regulations pertaining to sustainable disclosures. This proposal bears similarities to the recent EU Sustainable Finance Disclosure Regulation (SFDR), encompassing aspects such as the incorporation of risk management procedures to address climate-related risks.
While the consensus is that the US is lagging behind the EU and UK in terms of ESG policy and legislation, developments have been driven by the private market and the business case has a competitive advantage when looking to expand to the United States.
The developments in the circular economy and ESG present exciting market expansion opportunities. The growing demand for ESG-aligned organizations, products, and services will continue to create a market advantage for attracting talent, business resilience, and market penetration.
Implementing your ESG strategy
There are numerous ways in which digital technology can transform sustainable practices around the globe. The World Economic Forum reports that the utilization of digital technologies provides the potential to cut 20% of global emissions in the three highest emitting sectors: energy, materials, and mobility; by 2050.
Leveraging your organization’s use of innovation and digital technologies, such as the use of tools and systems that generate and process data—has the potential to power an organization’s ESG strategy and execution. From the perspective of positive business practices, ESG, and digital technology can be seen as two sides of the same coin.
When it comes to implementing your own ESG and more sustainable, and circular business practices, there are different avenues.
- Collaborate with your customers and ecosystem partners to co-create ESG or circular innovations, while also measuring the ESG innovations originating from external partners.
- Utilize data and AI to identify ESG innovation opportunities and predict future business and societal impact. By leveraging data and AI to uncover inefficiencies, biases, or negative outcomes affecting various groups, communities, or the environment, innovators can focus on developing new concepts to address these challenges and generate positive benefits for those affected. When it comes to circular business practices, one way AI can be leveraged is to enhance product utilization and seeks to extend the useful life of a product, such as through sharing economy platforms, product refurbishment programs, or enhancing product duration.
- Best Practice: SuperCircle has devised a digital framework that fosters circularity within the fashion industry. They achieve this by combining customer purchase data with warehouse and distribution systems to track the entire lifecycle of clothing. Through partnerships with brands and retailers such as Reformation, they offer customers the option to return goods in exchange for a credit or discount. Simultaneously, SuperCircle handles the logistics infrastructure required to aggregate and sell these clothes to the recycling sector. Recognizing the consumer as a temporary custodian of a durable asset unlocks a plethora of opportunities to maintain ongoing engagement with customers.
- Establish an internal ESG-driven innovation process and nurture your employees to become leaders who can incubate new innovations using emerging technologies to drive impact across people, profit, and the planet. This approach involves cultivating a structured process that integrates ESG considerations throughout the innovation lifecycle. Furthermore, with your team equipped with knowledge and expertise in emerging technologies and empowered to challenge assumptions, the incubation of new ventures will be enabled which can result in positive outcomes for your business with implications across social, economic, and environmental dimensions.
Hungry for more?
If you’re interested in learning more about this topic or want to know more about expanding to the US, get in touch! We’ll be happy to help identify US market opportunities for German companies.
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