|Richard Lee, McKinsey & Company's senior partner in Seoul, speaks during the 2021 Korea Times Global ESG Forum, at the KCCI building in Seoul, Thursday. Korea Times photo by Choi Won-suk|
By Lee Min-hyung
McKinsey & Company says more companies need to fulfill the environmental, social and corporate governance (ESG) standards, as the investment strategy allows them to enjoy medium- to longer-term sales growth, reduced costs and de-risking from possible business transitions.
"It requires drastic changes for any firm to achieve the ESG transformation," Richard Lee, McKinsey & Company's senior partner in Seoul, said during the 2021 Korea Times Global ESG Forum, held at the KCCI building in Seoul, Thursday.
"But this is an inevitable trend, as global capital is flowing into ESG-related projects. Companies that take responsibility for the environment and society will be able to enjoy the aforementioned three core benefits."
The global capital market is paying growing attention to the issue of corporate sustainability in the wake of the shock of the pandemic, and those embracing ESG principles stand a higher change of survival, according to him.
The amount of dedicated ESG funds skyrocketed to $1.4 trillion (1,560 trillion won) in 2020, from $0.5 trillion back in 2012, and the pace of growth will be on the rapid rise for the ESG-led capital market, according to McKinsey.
By region, Asia has much more room for growth in terms of ESG management, as the ESG-related share accounted for only about 1 percent of all the professionally managed assets in the Asian territory, excluding Japan, in 2016, according to data from the Global Sustainable Investment Alliance.
This percentage fell far short of other developed countries, such as Australia and New Zealand. These two countries' ESG investment proportion reached 63 percent during the same period. Canada and Europe also allocated almost half of their invested capital to ESG investments, according to data. The United States and Japan followed on the list with 26 percent and 18 percent, respectively.
Lee encouraged more Asian corporations to join the ESG-led paradigm shift, highlighting the fact that they can enjoy three core values by fulfilling socially and environmentally responsible management criteria.
First and foremost, he said that any company can achieve sales growth of around 10 to 20 percent by investing in the ESG market, as compared to conventional non-ESG-related areas. Lee said that the growth rates of sustainability-related markets and products typically outpace the growth of conventional ones.
McKinsey also said that companies that fulfill the ESG criteria will be able to enjoy an overall cost reduction of 5 to 10 percent. This overall cost reduction can help uplift their productivity, according to him.
"Focusing on sustainable practices helps improve operational efficiency, and purpose-driven organizations then have higher talent attraction, retention and engagement," he said.
Last but not least, ESG-focused management hedges against possible risk factors surrounding regulations and policy changes, according to the McKinsey partner.
"An ESG orientation helps to reduce transition-related risks of changes in rules and regulations ― such as policy risks ― and changes in stakeholder sentiments," he said.
ESG management will be crucial amid post-virus business uncertainties here and abroad, as it can help companies reduce such risks by up to 60 percent, he said.
This reduction of risks will result in measurable performance impacts, in terms of corporate valuation and companies' financial access.
"Companies with higher ESG ratings have higher valuations compared to peers with lower ESG ratings," Lee said.
As of the end of June 2020, more firms leading in the ESG field enjoyed valuation uplifts of 10 to 20 percent, compared to those with lower ratings, according to McKinsey.
He cited LEGO, Tesla and Verizon as successful examples of ESG-leading companies.
LEGO has explored rental and "circular economy" business models to unlock growth, and the company proved that 80 percent of consumers would switch to a brand supporting these aspects if price and quality are equal, he said.
Tesla also achieved strategic freedom through "win-win" regulatory outcomes by manufacturing eco-friendly electric vehicles.
BP, commonly known as British Petroleum, is another example of showing how ESG criteria have "changed everything," according to the consulting firm.
The company is in the early stages of embedding its new ESG purpose, to reimagine energy for people and the planet. BP has set five goals to get the company to net zero greenhouse gas emissions. Under the pledge, the company has promised to achieve net zero across its all operations on an absolute basis by 2050 or sooner.
This pledge has received positive responses from investors and the market. The firm's share price increased by 4 percent in one day, even despite the firm's announcement that it would cut dividend payments by 50 percent. The positive response from the market occurred due to the market's robust support of the company's ESG criteria fulfillment, according to McKinsey.
Discussions of ESG will pick up more steam down the road, as more and more central governments realize the importance of sustainable growth in the post-pandemic world, he said.
"The post-COVID-19 next normal will see rising government and societal expectations of corporations, elevating ESG principles even higher on the agenda," he said.