A stronger focus on employees and greater board diversity seems not just possible but imperative. Both are strong business trends and fit well with how companies can use ESG to enhance financial performance.
The combining of environmental, social, and governance issues into the holistic label of ESG has been a business reality for nearly two decades. In the meantime, the world’s concern about the impact of climate change, water scarcity, and air pollution has left many business leaders stuck on the E – overlooking the S and G dimensions.
The climate’s ticking clock and its growing effects has justified this focus on the environment. However, a broader embrace of ESG offers benefits that company leaders might not expect. Infosys research found that some social initiatives boost the bottom line, in addition to making businesses better corporate citizens.
Our global ESG Radar survey of more than 2,500 business executives and managers – 4% from companies based in India – found several initiatives or focus areas that correlate with increased revenue or profit growth. These initiatives are not standardized training programs or off-the-shelf solutions designed to satisfy the demands of regulators, or investors chasing market trends. Instead, the changes are structural ones that alter a company’s mindset and approach – focusing on employees first and embedding ESG in the leadership ranks.
More women needed on the board
Business leaders are already well aware of the need to create a more diverse workforce – one that reflects their communities and customers. These initiatives are necessary but not enough. Our research found that this commitment needs to extend to the board to gain the greatest benefits. An increase in the number of women on a company’s board was linked to better financial outcomes, according to our data analysis.
The good news for Indian companies is that women now hold 18% of board seats, an increase of 5% from 2017. Even with this progress, India ranks as one of the lowest in board diversity among the regions surveyed.
Analysis of our survey data, which included respondents’ reported financial performance, found that a 10-percentage point increase in women on the board strongly correlates with a 1-percentage point increase in profit growth. This effect is likely a proxy for board diversity, which is assumed to offer broader perspectives that lead to greater innovation. Student research at the University of Pennsylvania in the US found that a higher number of women on boards of Indian companies has a positive correlation with return on invested capital.
Put employees first
Our survey analysis also indicates that company profits increase more when their ESG efforts are motivated by how their employees view them, as compared to their reputation among customers alone. This correlates with about a three-quarters percentage point increase in profit growth. Indian companies prioritize reputation among their employees at a rate of 28%, the same as our overall sample and just 1 percentage point behind the highest priority – customers.
These benefits could be a result of better engagement among employees and greater success in recruitment, growth, and retention. This also reflects a stronger focus on employees as a valuable stakeholder, perhaps fueled by companies’ ongoing efforts to close their skills gaps.
Leaders should make their ESG efforts a pillar of their talent attraction and retention strategy. They can do this by expanding their internal ESG efforts and filling in the gaps where they are the weakest. India already beat the global average on creating ESG teams and ESG leaders or “champions”. However, they trail in offering ESG-focused employee training and creating financial incentives for employees or teams to meet their ESG goals.
Organizations in India need to consider how their industries can accelerate progress for larger communities. With digital transformation ruling the world over, IT companies have the opportunity to take up skilling efforts at scale and across all strata of society. These initiatives can allow companies to develop new pipelines of talent. However, this has not been a common strategy. Among the companies based in India, just 4% say their company has a community skills training program. That number lags the 23% of our total survey respondents who have such a program.
A stronger focus on employees and greater board diversity seems not just possible but imperative. Both are strong business trends and fit well with how companies can use ESG to enhance financial performance. Companies should shift their lens to view ESG as a value creator to experience the financial benefits of related investments and achieve significant impact towards a better and more sustainable future.
About the Author
(Authored By Aruna C. Newton, Vice President, Head – Diversity and Inclusion, ESG Governance & Reporting, Infosys Ltd)
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