Finding value in ESG impact

"There is nothing irrational or strange about looking at value creation in this way," says Swasti Gupta-Mukherjee, associate professor of finance at Loyola University Chicago's Quinlan School of Business. "Intangible factors like personal values which often underlie ESG have always been part of investor and consumer preferences. Even going back centuries, economic theory has left room for values to play a role in decision-making to reach optimal outcomes."

Gupta-Mukherjee teaches in Loyola's Baumhart Scholars MBA program and developed one of the eight courses in the world to receive the 2021 Ideas Worth Teaching Award from the Aspen Institute.

Below, she offers ways to think about ESG and sustainable capitalism.

Tapping into unlimited market potential

Gupta-Mukherjee challenges any new business – and also established ones – to be intentional about taking on a global challenge relevant to sustainable development, such as hunger, poverty, climate change, and public health.

"To turn challenges into opportunities, business leaders should think of these global challenges as having almost unlimited market potential," she says. "The most successful businesses will address the challenge in their corner of the world, then scale it up and collaborate explicitly or implicitly with a collective of public, private, and non-profit sector actors doing relevant work. This is the way that business can truly and collaboratively participate in creating integrated, sustainable value."

Being honest about ESG impact

For true long-term value, ESG must be an integral and organic part of the business and its business model, says Gupta-Mukherjee. When ESG metrics are simply added onto existing business models, they are less likely to be implemented or to create value, and could be seen as "greenwashing."

Given that the demand for ESG impact has grown but ESG metrics to measure it often miss the mark, businesses can be tempted to use ESG mainly for branding and marketing. This can eventually do more harm than good to corporate reputation and lead to loss of stakeholder trust. "Not being honest about ESG value-added is also ironic in that it is a short-term strategy in a world clamoring for long-term thinking, which ESG metrics are supposed to encourage!" says Gupta-Mukherjee.

Creating impact beyond the financial

Purely financial value is certainly easier to measure than other more holistic notions of value, says Gupta-Mukherjee. Signifying progress from business-as-usual, data providers are working on improving ESG and impact metrics that should further expand our understanding of value creation in business and investing beyond financial returns.

That's not to say that there is not already proof of the value of ESG impact for investors. "Many investors want to get the intangible benefits of investing in social impact and sustainable capitalism," says Gupta-Mukherjee. "Not only do they believe that companies that lean into ESG will be winners financially and for our world in the long term, but they also feel satisfied doing their bit to nudge us towards a more sustainable world."

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• Baumhart Scholars MBA