4 Ways Restaurants Can Create Value with ESG
Gone are the days when restaurants focus solely on providing good food and quality customer service. The rise of sustainability as a strategic imperative — and the integration of environmental, social and governance (ESG) factors into decision-making — are as much about the demands of the business as they are about the demands of society and the desire to make a positive impact on the world.
Addressing the interconnected challenges of our global society is a shared responsibility and an opportunity to drive improved environmental, social and business outcomes. Evidence shows that integrating ESG into a company’s core business strategy ensures the organization is more resilient and better positioned to adapt to change. Leading and governing with an ESG mindset reprioritizes long-term value creation and recognizes that purpose is the path to sustained profits and success.
HERE ARE FOUR WAYS ESG CREATES LONG-TERM BUSINESS VALUE FOR RESTAURANTS:
- Increase Customer Loyalty
Due to the Generation Hashtag (those born between 1991 and 2005), who grew up in the age of several recessions and an increasingly divisive culture, businesses cannot make tokenistic displays of social and environmental responsibility. This next generation is voting with their wallets, and research has shown they are more likely to support sustainable businesses.
Customers increasingly look at how food is sourced and request more nutrition and allergy information transparency. Customers also look at how eco-friendly restaurants are, especially in food packaging. Customer frustration with the lack of action regarding societal problems, such as corporate corruption and income inequality, has also driven restaurants to look at all their ethical and environmental practices throughout all aspects of their business.
In a 2021 Chapman & Co. Leadership Institute survey, 60% of U.S. consumers said brand values influence their purchasing decisions. 64% of Americans also say they would be willing to pay more for a sustainable product, and 62% of U.S. and U.K. consumers say they would join a customer loyalty program if they knew the rewards contributed to social causes they cared about.
Capture this benefit: To attract new customers and retain existing supporters, restaurants must not only address customer needs but customer values. Align services, products and customer offerings with the company’s own broader ESG priorities and ensure ESG commitments account for and reflect the issues customers care about most.
- Attract Talent & Improve Employee Loyalty
Since the COVID-19 pandemic, restaurants have been increasingly focusing on employee wellbeing. Employees are looking for their employers to provide a living wage and have policies in place to provide a better work-life balance. In addition, large franchising chains are updating their benefits to align more with employees’ requests. This includes providing higher education tuition assistance and increasing which workers receive benefits.
People want to work for organizations whose values align with their own. Career decisions are increasingly values-based, with “pandemic epiphanies” putting purpose front and center for many employees. As the war for talent hits a fever pitch, companies with strong ESG profiles will likely have greater recruitment and retention success, especially with younger generations. Nearly six in ten (58%) employees consider a company’s social and environmental commitments when deciding where to work.
Capture this benefit: Purpose is inseparably linked to ESG. It’s why your business exists—and for that “why” to be differentiated, it needs to deliver impact beyond economic value. Once defined, the purpose should be ingrained into your culture, business strategy and decision-making compass. To put meaning into practice, live it and lead with it. Promote your purpose through regular employee engagement and measurable commitments. Solicit employee feedback as commitments evolve over time.
- Drive Higher Profitability
As companies shift their focus away from optimizing for short-term profits, profitability actually increases over the long term. There may be short-term cost increases incurred when moving to sustainable sourcing or raising pay, but those costs are offset by the advantages they may bring. Stronger ESG practices correlate to higher margins, according to a study from Institutional Shareholder Services. The study shows that high ESG performers spend more on research and development but less on capital expenditures. How? Adopting ESG measures can save costs by using resources more efficiently, lowering overhead expenses and reducing waste.
Capture this benefit: Review your restaurant operations and identify opportunities to streamline resource usage, reduce water and energy consumption and eliminate harmful waste. Collaborate with stakeholders up and down the value chain to assess where there may be critical issues and opportunities to design new products and services that deliver ESG outcomes and redesign existing offerings by integrating ESG practices.
- Mitigate Risk & Build Resilience
Companies with strong ESG practices are not only more resilient in times of adversity, they also face fewer material adverse events to begin with. By proactively identifying and addressing ESG-related threats, businesses can reduce incidence risk. A Wharton study found that strong ESG performers have a much lower incidence rate of fraud, litigation, customer attrition and revenue shortfalls. Conversely, companies with unaddressed ESG-related risks are more exposed to potential erosion in financial and operational performance over time, even if they don’t experience a business or reputational crisis. The opportunity cost in terms of the competitive landscape and market perception may also be significant. Research from Bank of America Merrill Lynch suggests that more robust ESG strategies would have helped prevent as much as 90% of the bankruptcies in the S&P 500 between 2005 and 2015.
Capture this benefit: Conduct a materiality assessment and identify the strategies and actions needed to mitigate your restaurant’s priority ESG risks. Every company’s priorities are unique, based on the potential impact—positive or negative—of specific ESG topics on your business and your stakeholder ecosystem. A materiality assessment provides a mechanism to hear from stakeholders about what matters most to them. That feedback, as well as a quantitative assessment of the potential impact of ESG issues, is critical to determine strategic importance.
What can your restaurant do now?
While large, multi-location restaurants are the primary movers in incorporating ESG components into their business practices, any size of restaurant can reap benefits if done properly. Always talk with your employees and customers since they are the most significant drivers in ensuring ESG efforts are genuine and meet what your stakeholders want. Documenting these steps to incorporate ESG components into your business practices brings increased loyalty from employees, vendors, customers, and the community around your restaurant.
Contact your Adams Brown advisor if you have questions about how the growing ESG trend in business metrics may impact you.