Consistent and profitable growth Since the global financial crisis, achieving goals has become more difficult, making it important for companies to clearly choose to grow in their mindset, path and ability to execute. Many executives believe that making growth sustainable and inclusive requires arcane trade-offs: giving up revenue and profits for society and the planet. This is not always the case. Our new analysis incorporates environmental, social and corporate governance (ESG) priorities into growth strategies, and shows that financially successful companies outperform their peers, provided they also outperform on fundamentals. This shows that the company is outperforming the company. The message is clear. Not only can you do good while doing good, you can also do better.
We examine the TSR, financial performance, and ESG ratings of 2,269 public companies and identify the top and bottom performers in their industry along the axes of ESG score, annual revenue growth, and economic profit. (see sidebar, “Our Methodology”). Our analysis shows that companies that achieve better growth and profitability than their peers while improving sustainability and ESG outperform their peers and outperform their peers in shareholder returns. These “triple outperforming companies” achieve an annualized TSR of 2 percentage points above the best performing companies on financial metrics alone (7 percentage points above the rest of the data set), making them powerful This suggests that strong ESG initiatives further increase shareholder value for companies that outperform their peers. It has excellent growth potential and profitability (Chart 1).
The important thing to remember is that good ESG performance cannot compensate for poor growth or profitability. For example, a company with lagging growth and profits may outperform only on ESG metrics, but underperform its peers by 5 percentage points on TSR. In other words, ESG is not a panacea and cannot save underperforming companies with flawed strategies. Furthermore, this analysis does not imply that capital markets give a valuation premium to companies that outperform by a factor of 3, only that those companies outperform on financial metrics. There is.
Revenue + Economic Profit + ESG Progress = Outsized Profit
Strong growth has been slow over the past 15 years, with the world's largest companies growing at half the rate they were before 2008. From 2017 to 2021, fewer than 1 out of 4 companies in our sample achieved annual revenue growth of 10% or more. However, triple outperforming companies fared much better, with more than half growing by more than 10% (Exhibit 2).
Triple outperforming companies achieved a median annual revenue increase of 11%. This was 1.4 percentage points higher than the median achieved by profitable growth companies that lag on ESG. Additionally, triple outperformers outperformed profitable growth companies by 2.5 percentage points in median excess TSR.
The timeless principles of shareholder value creation remain the same. ESG initiatives must ultimately show up in financial performance and generate significant returns. The importance of actively choosing to grow by adopting the right mindset, strategies, and capabilities also remains essential. If you can grow profitably as a sustainability leader, the market will reward you for that growth. For example, a recent McKinsey analysis found that chemical companies with high exposure to low-carbon product portfolios and end markets that support sustainability were among the least likely to lag on sustainability from 2016 to 2021. It has been shown to increase shareholder returns by more than double. Growth opportunities associated with increased demand for lithium due to green technology are being well received by the market.
We note that not all industries' registered shareholder returns correlated with improved ESG ratings during our study period, and some returns may be affected by the current economic downturn. (See sidebar “Impact of recent market corrections”). Largest shareholder gains accrued to companies that tripled their performance in the basic materials, advanced electronics and financial sectors, likely supporting a 'green premium' and lowering risks around regulatory and carbon-related costs. This seems to be due to changes in consumer preferences. Meanwhile, the tech and retail industries have yet to realize the benefits of significantly improved ESG ratings. Industry trends and the COVID-19 crisis (which led to growth in tech, but not in retail) may have outweighed the impact of ESG in these sectors. However, we believe that ESG performance standards are rising rapidly across sectors and regions. Furthermore, simply keeping pace with the industry does not provide a market premium. Investors reward companies that not only perform well in other dimensions, but also improve their ESG ratings faster than their peers.
How to make a growth triple play
So how do companies that have tripled their growth achieve that feat? They tend to operate on five principles: It's about integrating growth, profitability and ESG into your core strategy. Drive value creation by innovating ESG services. Use M&A to quickly capture ESG growth pockets. Transparently track and report ESG and related data. It's about embedding strategic priorities into an organization's DNA.
Integrate growth, profitability, and ESG into your core strategy. Rather than pursuing ESG-related initiatives as a side hustle, top performers incorporate them into their overarching corporate strategy alongside growth and profitability. Consider the example of his three best-performing companies in metals and mining that have focused their strategy and investments on decarbonization as a way to achieve all three goals. The company has divested its coal-based businesses and shifted to materials that support the energy transition. To drive top-line growth, we have set a ring budget for investments in green aluminum, green steel, carbon capture solutions and other high-growth markets. In parallel, we have launched several social initiatives aimed at increasing employee productivity while reducing the risk of regulatory and legal intervention. For example, we implemented plans to create safer and more inclusive working environments and addressed local impacts through agreements with indigenous peoples and local communities.
Innovate ESG services to drive value creation. Triple outperformers often operate at the cutting edge of innovation, both in what they do and how they do it. Many companies are focusing their innovation efforts primarily on top-line growth by developing products that better meet customer needs and, where possible, respond to new ESG-based demands.
This may include creating solutions that help corporate clients meet ESG-related customer and regulatory needs. For example, one European transportation and logistics provider turned to innovation to gain her ESG lead in the industry as ESG themes were gaining stakeholder attention. The company decided to focus on helping its customers reduce their carbon footprint in their supply chains. The company has established an innovation hub to guide its global efforts and established technology trend tracking mechanisms to keep abreast of emerging technologies. We also collaborate with external sustainability, digitalization and innovation experts to develop solutions tailored to our customers' supply chain challenges. This investment has created new premium-priced services for carbon reporting and offsets, sustainable fuels, and supply chain design and optimization, resulting in significant revenue growth. As a result, the company has translated its first-mover ESG advantage into annual revenue growth that is 20% higher than its peers, and has delivered an excess TSR of 20% annually since 2017.
Use M&A to accelerate the acquisition of profitable ESG growth pockets. Programmatic M&A can accelerate companies' entry into new growth areas. Successful players tend to look for adjacent growth pockets that are underserved and allocate ring-fenced funds to capture those opportunities. Many triple outperformers go one step further by integrating ESG criteria in addition to existing financial and market criteria when evaluating potential adjacencies and selecting M&A targets.
For example, a multinational cosmetics company built a reputation for focusing on sustainability and inclusivity by shifting its asset portfolio toward ESG-oriented products. Over 10 years, the company has acquired 12 innovative companies, added luxury brands with sustainable and inclusive products and services, and expanded into new areas such as women's health tech. By leveraging synergies between brands, we captured pockets of growth in both our core business and adjacent segments. Along the way, the company's ESG rating increased by 39 percentage points during the study period, and investors saw the company's shareholder return increase by 25 percentage points annually, above the industry average.
We will report and communicate transparently. We often hear business leaders express frustration that capital markets do not recognize and reward their companies' investments in longer-term initiatives, and this is often true for ESG-related growth ventures as well. . There are many reasons why this may be the case, but rigorous reporting and proactive communication to the investment community about how these efforts are adding value and improving goals and progress will help reap these rewards. It is important to Communication alone does not add value, but transparency drives investors' awareness of the future. Once a company has set clear and ambitious goals, it must continually demonstrate where its value comes from and, where possible, provide external validation to give credibility to its progress among consumers and investors. should also be accompanied by evidence of progress made in related efforts.
For example, a European software provider created an easy-to-use, interactive tool that publicly tracks progress on key ESG indicators along with financial performance. This dashboard is particularly robust in tracking the “S” (social) dimension that the company prioritizes. For example, the gender ratio of employees can be viewed not only by seniority, but also by the number of part-time and full-time workers, and the number of permanent and temporary workers. Meanwhile, a multinational automotive technology supplier is continuously strengthening its technology and sustainability strategy and connections with external stakeholders, and is focusing on integrating sustainability and its ESG goals into market growth, productivity and , closely tied to strategic objectives such as customer satisfaction.
Embed strategic priorities into your organization's DNA. Triple outperforming companies are translating high levels of growth, profitability, and ESG strategies into concrete initiatives that form part of their new corporate strategies. The management team sets clear responsibilities, performance metrics, and goals and measures them rigorously. It also reallocates resources towards these new opportunities and ensures internal processes encourage business leaders to incorporate relevant criteria, including ESG, into their decision-making.
For example, a global shipping company that tripled its business results ensured that its strategy was fully integrated into the organization. The company has committees at every level, from the board of directors to operations, to comprehensively evaluate most metrics, including growth, profitability, and ESG. Additionally, the organization has tied compensation to key ESG objectives and built partnerships with customers to co-develop new green solutions. The company's focus on governance not only drives revenue growth, but also helps it optimize costs and prepare for potential legal interventions such as carbon emissions taxes.
ESG performance measurement is still evolving, but the direction is clear and action is needed now. Leaders need to take a long-term view and have the courage to invest in sustainable and inclusive growth that delivers revenue, economic returns and shareholder returns.