According to researchers, environmental, social, and governance (ESG) has been discussed extensively, specifically as a socially responsible investment. Regardless of this exploration, researchers have failed to critically examine the concept of ESG integration and how it impacts the transformation of business models from conventional to more sustainable ones. The chapter utilized a meta-analysis to critically examine previous research findings. The data collection method involved analyzing qualitative and quantitative research that allowed deriving generalized conclusions about ESG and building sustainable business models based on the existing literature. ESG integration benefits the pertinent firms. The advantages are apparent with the study showing that ESG integration results in positive returns on equity and assets. Organizations with strong ESG performance are ranked as best-performing firms and have a lower cost of debt. This benefit means that firms should focus on ESG integration and building new business models resulting in improved financial performance.
Top1. Introduction
In the recent past, environmental, social, and governance (ESG) has gained significant traction. According to Aldowaish et al. (2022), ESG is associated with growing interest by investors at domestic and international levels. Based on past research, scholars reveal that investors applauded companies with good ESG. Their appreciation was based on the conception that poorly disclosed ESG was an indicator of idiosyncratic risks. For example, the lack of ESG in a company is believably because of poorly-made investments, especially in high-risk areas. The high-risk areas, in this context, refer to sectors that may discriminate against workers or pollute the environment. Amel-Zadeh and Serafeim (2017) supports this idea by hypothesizing that integrating ESG into investment decisions is vital as it helps pertinent individuals make sound decisions that are guided by a company’s overall performance rather than just its financial performance. Friede et al.’s (2015) exploration of ESG implies that the approach embraced by investors is influenced by the fact that it refers to organizational obligations focused on improving social welfare. Improved social welfare translates to sustainable and equitable long-term wealth for the stakeholders.
The bigger picture about ESG and its integration into a firm’s operation is that better governance, sustainable development, and environmental care characterize ESG-compliant organizations. In an attempt to understand the significance of ESG in businesses, Amel-Zadeh and Serafeim (2017) noted that related issues are gaining increased concern among the investor community. The approach by most investors is based on the understanding that organizations have increased their expectations about different stakeholders. They expect stakeholders to act right and embrace a proactive approach that helps manage ESG threats and opportunities and how they apply to existing business strategies. Precisely, the global investment community is currently more interested in ESG issues. Investors’ interest in ESG is like the demand for corporate leaders to improve sustainable practices that benefit an organization’s bottom line and impact the wider community. According to Brooks and Oikonomou (2018), investors’ demands align with the current approach to ESG and its connection to corporate performance, particularly because the two are intrinsically intertwined. Thus, firms with commendable ESG performance have a high likelihood of talent retention, record better financial performance, and have long-term value creation.
As investments dedicated to ESG and sustainability continue to grow, organizations are incorporating ESG as part of their new business models. Câmara and Morais’s (2022) survey of trends shows that the number of firms adopting ESG compliance is on the rise. An increase in the adoption is linked to the impacts of ESG on new business models. Specifically, the move by organizations towards improved sustainability is one of the factors behind the increased adoption of ESG in business models as it improves their corporate social responsibility. An entry by Aagaard (2018) presents ESG from the perspective of how it relates to business models. Spoz (2021) also examines this concept to show that ESG impacts business model outcomes, which explains the rush for its integration. The results from both surveys suggest that research about the integration of ESG in business models may not be that substantial. Still, it is undeniably clear that ESG incorporation in business models helps improve sustainability. A survey by Jørgensen and Pedersen (2018) highlight that in creating new sustainable business models, the implementation of ESG is necessary as it helps ensure that the embraced approaches are compatible with the primary goal of sustainability. As a result, firms that have integrated ESG into their business models are laudable since they are likely to adopt sustainability-related actions.