Environmental, Social, and Governance (ESG) Concerns  87 opportunities for growth. For example, in a recent, massive public–private infrastructure project in Long Beach, California, the for-profit companies se- lected to participate were screened based on their prior performance in sus- tainability. Superior ESG execution has demonstrably paid off in mining as well. Consider gold, a commodity (albeit an expensive one) that should, all else being equal, generate the same returns for the companies that mine it re- gardless of their ESG propositions. Yet one major study found that companies with social engagement activities perceived to be beneficial by public and so- cial stakeholders had an easier go at extracting those resources, without exten- sive planning or operational delays. These companies achieved demonstrably higher valuations than competitors with lower social capital.7 ESG can also drive consumer preference. McKinsey research has shown that customers say they are willing to pay to “go green.” Although there can be wide discrepancies in practice, including customers who refuse to pay even 1 percent more, the researchers found that when consumers were surveyed on purchases in multiple industries, including the automotive, building, electron- ics, and packaging categories, upward of 70 percent said they would pay an additional 5 percent for a green product if it met the same performance stan- dards as a nongreen alternative. In another study, nearly half (44 percent) of respondents identified business and growth opportunities as the impetus for their companies to start sustainability programs. The payoffs are real. When Unilever developed Sunlight, a brand of dish- washing liquid that uses much less water than its other brands, sales of Sunlight and Unilever’s other water-saving products proceeded to outpace category growth by more than 20 percent in a number of water-scarce ­markets. Procter & Gamble, too, is taking aim at developing an estimated $20 billion prod- uct line of detergents that are effective in cold water.8 And Finland’s Neste, founded as a traditional petroleum-refining company more than 70 years ago, now generates more than two-thirds of its profits from renewable fuels and sustainability-related products. Cost Reductions ESG can also reduce costs substantially. Among other advantages, execut- ing ESG effectively can help combat rising operating expenses (such as raw materials costs and the true cost of water or carbon), which McKinsey research found can boost operating profits by as much as 60 percent. The researchers created a metric—the amount of energy use, water use, and waste created in relation to revenue—to analyze the relative resource efficiency of companies 7 W. J. Henisz, S. Dorobantu, and L. J. Nartey, “Spinning Gold: The Financial Returns to Stakeholder Engagement,” Strategic Management Journal 35, no. 12 (December 2014): 1727–1748. 8 Henisz, Corporate Diplomacy. 88  Valuation of ESG and Digital Initiatives within various sectors. They found a significant correlation between resource efficiency and financial performance. The study also identified companies across sectors that did particularly well in terms of resource efficiency and financial performance—precisely the companies that had taken their sustain- ability strategies the furthest. As with each of the five links to ESG value creation, the first step to real- izing value begins with recognizing the opportunity. Consider 3M, which has long understood that being proactive about environmental risk can be a source of competitive advantage. The company has a program called “pollution pre- vention pays,” which aims to prevent rather than clean up pollution; efforts have included reformulating products, improving manufacturing processes, redesigning equipment, and recycling and reusing waste from production. Since introducing the program in 1975, 3M has saved $2.2 billion. Another enterprise, a major water utility, achieved cost savings of almost $180 million per year through lean initiatives aimed at improving preventive maintenance, refining spare-parts inventory management, and tackling energy consump- tion and recovery from sludge. FedEx, for its part, aims to convert its entire 35,000-vehicle fleet to electric or hybrid engines. To date, 20 percent have been converted, which has already reduced fuel consumption by more than 50 mil- lion gallons.9 Reduced Regulatory and Legal Interventions A stronger external-value proposition can enable companies to achieve greater strategic freedom, easing regulatory pressure. In case after case, across sectors and geographies, we’ve seen that strength in ESG helps re- duce companies’ risk of adverse government action. It can also engender government support. The value at stake may be higher than you think. Typically one-third of corporate profits are at risk from state intervention.10 Regulation’s impact, of course, varies by industry. For pharmaceuticals and health care, the profits at stake are about 25 to 30 percent. In banking, where provisions on capi- tal requirements, “too big to fail” regulations, and consumer protection are so critical, the value at stake is typically 50 to 60 percent. For the automo- tive, aerospace and defense, and tech sectors, where government subsidies (among other forms of intervention) are prevalent, the value at stake can reach 60 percent as well. 9 W. J. Henisz, “The Costs and Benefits of Calculating the Net Present Value of Corporate ­Diplomacy,” Field Actions Science Reports, special issue 14 (2016), https://journals.openedition.org/­factsreports/4109. 10 See Henisz et al., “Five Ways That ESG Creates Value.”