Balancing goodness and profit
New research from Gustavson explores the vital link between Environmental, Social and Governance (ESG) decisions and strategy.
Top photo: (L-R) Professor Ravee Chittoor and Gustavson PhD graduate Ye He
Businesses face growing pressure to adopt Environmental, Social, and Governance (ESG) principles—but at what cost? New research from UVic’s Gustavson School of Business provides key insights into how businesses can balance ethics and profitability.
A new study by Professor Ravee Chittoor and Gustavson PhD graduate Ye He reveals how ESG investments can drive financial success—or fall short—based on a company’s strategy. This research is the first to provide clear data on how different competitive strategies affect the financial returns of ESG efforts.
“This research is essential for CEOs and consultants who want to weave ESG into their strategy without compromising profit,” says Chittoor. “Our findings show that the financial impact of ESG isn’t one-size-fits-all—it depends on a company’s competitive approach.”
Standing out from the crowd
Companies that offer unique products or services are in the best position to see financial gains from their ESG efforts, the study finds. These businesses can leverage ESG to build brand loyalty, enhance their reputation and charge higher prices.
“For companies aiming to differentiate, ESG can be a powerful competitive advantage,” says Chittoor. “For instance, Unilever’s commitment to deliver net zero emissions across its value chain and end plastic pollution strengthens its brand image and allows it to charge premium prices. Similarly, Steinway & Sons, a craft piano maker, collaborates with virtuoso pianists to innovate and enhance its products, reinforcing its differentiation advantage.”
In contrast, businesses that compete mainly on cost face more challenges. For them, ESG initiatives can become a financial strain unless closely linked with broader business goals.
“Cost leaders like McDonald’s and Walmart, for example, face challenges in balancing the interests of their employees, the environment, and other key players while keeping prices low,” explains He, now an assistant professor of strategy at Warwick Business School in the United Kingdom.
Chittoor and He also warn against greenwashing—where companies make false claims about their ESG efforts. The study shows that when ESG is not aligned with a company’s strategy, it can damage trust with customers and business partners. To avoid this, businesses must ensure that ESG efforts are a core part of their operations.
Focusing on key players
The study’s data shows that businesses should prioritize the people and groups most connected to their success—such as customers, employees, and investors—rather than focusing on more distant communities or organizations. In this complex ESG landscape, companies should avoid simply “keeping up with the Joneses” and instead focus on what matters most to those who directly impact their bottom line.
“The real challenge is staying focused on what resonates with your key audience. Jumping on popular causes without a clear strategy can lead to superficial efforts that don’t pay off in the long run. Our research shows that successful ESG initiatives come from aligning with the values and priorities of those who matter most to the business.”
A new frontier for research
In a world where ESG is no longer optional, this study gives business leaders the insights they need to balance profit and purpose. But it also opens new questions.
Chittoor is equally excited by these future opportunities: How can cost-focused companies find new ways to gain a competitive edge while still meeting ESG goals? Could companies naturally adapt their strategies based on their competitive strengths?
These questions, which stem from the study's findings, suggest that companies must not only align their ESG initiatives with their existing strategies but also look for new ways to innovate and grow while addressing the needs of key groups and partners.
“The challenge of creating a lasting competitive edge while meeting ESG goals is fertile ground for future research,” says Chittoor. “It has the potential to shape how businesses approach ESG in the future.”
“This evolving field will not only help us understand when ESG investments pay off, but also offer a roadmap for leaders to succeed in an increasingly complex world.”