Part 1: Mckinsey Report & the Importance of ESG

Sustainability has become an increasingly important issue for companies of all sizes, from small startups to large corporations. It’s not just a matter of doing the right thing; it’s also good for business. A recent report from February, 2023 by McKinsey & Company, a global consulting firm, shows that companies that invest in environmental, social, and governance (ESG) initiatives are more likely to achieve long-term growth and financial success.

The report analyzed copious amounts of data and found that companies with strong ESG performance achieved higher revenue growth and margins than their peers with weak ESG performance. The report also found that ESG-related claims can be a means of differentiation, with less-common claims associated with higher growth than more prevalent claims.

One key finding of the report is that there is no one ESG-related product claim that outperforms all others, but less-common claims tend to be associated with larger effects. For example, products that made the least prevalent claims, such as “vegan” or “carbon zero,” grew 8.5% more than peers that didn’t make them. Products making medium-prevalence claims, such as “sustainable packaging” or “plant-based,” had a 4.7% growth differential over their peers. The most prevalent claims, such as “environmentally sustainable,” corresponded with the smallest growth differential. This suggests that companies need to carefully consider which ESG-related claims are most important to their customers and their overall ESG strategy.

Another key finding is that combining ESG-related claims may convey more authenticity. The report analyzed the effects on growth when a product package displayed multiple types of ESG-related claims. On average, products with multiple claims across six ESG classification themes grew more quickly than other products. In nearly 80% of the categories, the data showed a positive correlation between the growth rate and the number of distinct types of ESG-related claims a product made. This suggests that consumers may be more likely to perceive that a multiplicity of claims made by a product correlates with authentic ESG-related behavior on the part of the brand.

The report also found that success in the less-expensive price tiers might reflect the high prevalence of private-label products making ESG-related claims. In 88% of categories, private-label products that made them seized more than their expected share of growth. This suggests that consumers choosing private-label brands may not merely be searching for the cheapest items available; they might also be eager to support affordable ESG-related products. During an inflationary moment, when affordability is probably becoming more important to consumers, CPG manufacturers and retailers might consider interpreting these data as incentives to offer their value-seeking shoppers more ESG-friendly choices at these lower price points.

What does this mean for companies? The McKinsey report suggests that companies should prioritize and invest in ESG-related actions that deliver the greatest advancement of their overall ESG commitments and then publicize those actions, where appropriate, with claims across their product portfolios. Companies should also consider building strong product design capabilities that take a holistic look across costs, quality, and ESG-related impact. They should ensure that investments in ESG-related claims have the greatest possible impact, by using a disciplined design-for-sustainability approach that maximizes the visibility, efficacy, and cost-efficiency of ESG-related product features that will resonate with consumers.

The McKinsey report highlights the importance of ESG work for companies of all sizes and in all sectors. By making meaningful commitments to ESG initiatives and backing them up with action, companies can not only create positive social and environmental impacts, but also differentiate themselves in the market and achieve growth.

As the report suggests, it is important for companies to prioritize and invest in ESG-related actions that have the greatest impact and to inform customers of those actions through meaningful engagement. Companies should also consider developing a product design process that embraces ESG-related claims alongside cost engineering, and investing in ESG through both existing brands and innovative new products. Furthermore, companies should understand the ESG-related dynamics specific to each category and brand, and embrace the holistic, interconnected nature of ESG by creating products addressing multiple concerns.

As the world continues to face urgent social and environmental challenges, it is essential that companies take proactive steps to address them. By committing to ESG initiatives and backing them up with action, companies can not only create positive impacts, but also differentiate themselves and achieve growth.

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All report data is shared & owned by Mckinsey. Reference article can be found here.