Do ESG Efforts Create Value?

Research by Bain & Company and EcoVadis indicates that

positive ESG outcomes are a trait of successful companies.

By Axel Seemann, Sylvain Guyoton, Anna Bianchi, and Jacqueline Han

Acknowledgments

The authors would like to thank Daniel Beck, Hannah Buckschun, and Othmane Boujemaoui for
their significant contributions to this article.

Copyright © 2023 Bain & Company, Inc. All rights reserved.

 EcoVadis | Bain & Company, Inc.

Do ESG Efforts Create Value?

At a Glance

` Beyond benefiting the planet and society, sustainability measures correlate with financial
performance, our research shows.

` We found connections between sustainability and business results in the areas of sustainable
supply chain, renewable energy, employee satisfaction, and DEI.

` By making three no-regrets moves, companies and private equity funds can realize financial
returns while accelerating their ESG transition.

When it comes to environmental, social, and governance (ESG) issues, private equity executives are
navigating a crosscurrent of pressures. Some limited partners and stakeholders are pushing to embed
various aspects of sustainability into investment decisions and portfolio company management, while
other stakeholders question its usefulness. The investment policies of 70% of the limited partners
surveyed by Bain & Company and the Institutional Limited Partners Association in 2021 included an
ESG approach.

All of this adds urgency to a complex question: Do ESG efforts create value?

In search of an answer, Bain worked with EcoVadis to assess, for the first time, how ESG activities
impact the 100,000 companies tracked by EcoVadis, more than 95% of which are private. (Bain has an
investment in EcoVadis, a leading supplier of business sustainability ratings.)

Our research examined how various aspects of sustainability and ESG activities—things like setting ESG
targets, tracking results, embedding sustainability into management processes, procuring sustainably,
and putting in place programs to reduce carbon and improve diversity, equity, and inclusion—
correlate with both ESG outcomes and financial performance. Not every analysis yielded a positive
correlation, but the research did reveal that, in addition to benefiting the planet and society, ESG
activities have no strong negative correlations with financial outcomes; in fact, they are associated
with encouraging revenue growth and EBITDA margins. Our findings indicate that positive ESG
outcomes are a trait of successful companies and that sustainability measures correlate with better
financial performance.

Of course, many factors influence a company’s financial results, and it’s not possible to say that
these companies’ sustainability efforts led to their strong financial outcomes. And while these

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Do ESG Efforts Create Value?

early findings are encouraging, the ESG landscape remains nascent. As ESG data becomes richer
and more nuanced, we expect to find even stronger evidence of a relationship between ESG activities
and financial results.

Companies with strong ESG activities produce strong ESG outcomes (see Figure 1). They improve
carbon emissions, use renewable energy, and have more diverse leadership and talent. Working
together like the gears of a pocket watch, these activities correlate with improvement in financial
and operational results, including higher profitability and revenue growth, customer satisfaction,
and employee satisfaction.

Companies with strong ESG activities produce strong ESG outcomes.

They improve carbon emissions, use renewable energy, and have
more diverse leadership and talent.

Strong ESG performance is a sign of a strong business

When we talk about ESG leaders in private equity, we mean, for example, a portfolio company that uses
more renewable energy than the average competitor, that has a diverse executive team, and that has
been recognized for its high level of ESG maturity by ratings providers.

Among the many areas ESG covers, we found connections between business results and four different
aspects of sustainability.

Diversity, equity, and inclusion. Companies highly rated by EcoVadis on the S (social) component
of ESG have greater female executive team representation, on average, and companies with the
greatest female representation on their executive team have better financial results. Companies that
rank in the top 25% of their industry for executive team gender diversity have annual revenue
growth approximately 2 percentage points above that of companies in the bottom quartile (see Figure 2).
And their EBITDA profit margins are also 3 percentage points higher than that same group. Other
studies have attributed this to the fact that having a diverse leadership team provides a broader view
of opportunities and risks.

Employee satisfaction. ESG leaders have higher employee satisfaction, and companies with the most
satisfied employees grow faster and are more profitable. They have three-year revenue growth up to

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Do ESG Efforts Create Value?

Figure 1: Robust ESG activities correlate with strong ESG outcomes and financial results

ESG activities
• Setting ESG targets,
tracking key performance
indicators, embedding
ESG outcomes
sustainable policies into
management processes • Lower carbon emissions,
• Managing initiatives to reach greater renewable
targets for carbon reduction, energy usage
DEI, and other ESG programs • Leadership and
• Sustainable procurement talent diversity

Financial results
• EBITDA margin
Additional benefits
• Revenue growth
• Customer satisfaction
• Employee satisfaction

Source: Bain & Company

Figure 2: Companies with more women on the executive team have better financial results

Growth Profitability

Median revenue CAGR, 2019–21 Median EBITDA margin, average 2019–21

12%

4%
9%

2%

Bottom 25%/ Top 25%/ Bottom 25%/ Top 25%/

lowest share highest share lowest share highest share

Female share of top executive team

Notes: Female share of top executive team evaluated by industry; global analysis includes companies with more than $1 billion in revenue in industries with at
least 20 companies with relevant data
Sources: EcoVadis; Bain analysis (n for growth=174; n for profitability=168)

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Do ESG Efforts Create Value?

5 percentage points above those with less-satisfied employees and margins as much as 6 percentage
points higher than those laggards (see Figure 3).

ESG activities focused on the workplace help companies do better by their employees. Beyond the
basics of fair pay and ensuring a safe work environment, benefits may include career training,
mental and physical healthcare, childcare, and educational opportunities, all of which boost
employee satisfaction and, as a result, productivity, retention, and the employer’s ability to attract
top talent.

Renewable energy. In the natural resources, transportation, and industrial goods sectors, companies
with high EcoVadis ratings on environmental topics use more renewable energy and have higher
EBITDA margins. In the EU, where there is a carbon tax, lowering emissions directly benefits the
bottom line; around the world, greater use of renewables also helps hedge against fluctuating fossil
fuel prices, and sometimes it’s just cheaper.

Sustainable supply chain. Companies at the forefront of sustainable procurement also have a
profitability edge, with margins 3 percentage points above those that don’t focus on their suppliers’
ethics, environmental, and labor practices (see Figure 4).

Figure 3: Companies with the most satisfied employees grow faster and are more profitable

Growth Profitability

Median revenue CAGR, 2019–21 Median EBITDA margin, average 2019–21

5% 16%

13%
4%

10%

0
60% or less 61%–80% 81% or more 60% or less 61%–80% 81% or more

Share of employees who would recommend their workplace to a friend

Note: Includes EU and North American companies with 100 or more ratings on Glassdoor and more than $1 billion in revenue
Sources: EcoVadis; Glassdoor; Bain analysis (n for growth=424; n for profitability=418)

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Figure 4: Sustainable procurement leaders are more profitable

Median EBITDA margin, average 2019–21

14%

11%

Laggards Leaders

EcoVadis activity rating in sustainable procurement

Notes: Leaders have an EcoVadis sustainable procurement score of 70 or higher; laggards have a score of 30 or lower; global analysis includes companies with
more than $1 billion in revenue in industries with at least 50 companies with relevant data
Sources: EcoVadis; S&P Capital IQ; Bain analysis (n=1,208)

How private companies can catch up

Large public companies have focused on measures such as decarbonization for some time, but
many private companies are only now beginning to seriously address them. Our research shows that
53% of large public companies achieve top EcoVadis scores for carbon management, for example,
compared with only 35% of large private companies.

Select PE firms have recognized the benefit of early adoption of ESG initiatives, however. One global
multistrategy fund recently studied the correlation between the EcoVadis ESG ratings of its portfolio
companies and their multiple on invested capital (MOIC) and internal rate of return (IRR). It found
that the companies with a higher MOIC and IRR also had higher EcoVadis ratings, illustrating that
positive ESG outcomes are a trait of successful companies. And some 93% of limited partners surveyed
by Adams Street said that investment returns are enhanced by incorporating ESG factors into their
decision making.

By studying the capabilities and actions of ESG leaders, private companies and private equity funds can
learn how to effect meaningful change while also realizing financial returns and accelerating their
ESG transition.

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Private equity investors and companies at all levels of ESG maturity can make these no-regrets
moves now:

• First, understand where you are in your ESG journey. Companies and investors can use materiality
assessments and benchmarking to identify gaps with ESG leaders in their industries and determine
what’s needed to bridge them.

• For companies early in their ESG work, it makes sense to start by building ESG capabilities in-house.
This entails a focus on the social aspects of ESG, including training managers on best practices
for employee health and safety, selecting a data management tool to build ESG data transparency,
and ensuring that basic governance standards on issues like corruption and bribery are in place.
This is also the moment when investors and companies can set ESG targets to engage their
organizations in their sustainability journeys.

• More advanced companies can engage their supply chain on ESG goals, use ESG to differentiate
their product, and focus on the aspects of ESG that are most material in their industry. These will
often be environmental issues, such as lowering the carbon footprint, including Scope 3 emissions
in that calculation, and developing product circularity.

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Bold ideas. Bold teams. Extraordinary results.
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Across 65 cities in 40 countries, we work alongside our clients as one team with a shared ambition to achieve
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EcoVadis

EcoVadis is a purpose-driven company whose mission is to provide the world’s most trusted business sustainability
ratings. Global supply chains, financial institutions, and public organizations rely on EcoVadis to monitor and
improve the sustainability performance of their business and trading partners with its evidence-based ratings,
scorecards, benchmarks, and insights.

www.ecovadis.com

For more information, visit www.bain.com