ESG – Environmental Social Governance concerns are important for businesses for several reasons. These businesses may want to please their customers, who are increasingly choosing brands with strong ESG credentials even if it means paying a higher price. Alternatively, they may be attempting to stay ahead of even more stringent regulations that are likely in the future. Many businesses are responding to pressure from banks and investors, a desire to improve employee engagement, or a desire to attract and retain talent better.
For most businesses, however, the answer is a combination of all these factors, which means there is a great need to understand and manage the environmental impact across entire businesses in real-time.
Also Read: What is ESG – Environmental Social Corporate Governance?
Leading players are already reaping tangible rewards for their efforts. There is plenty of emerging evidence that investing in ESG not only leads to rapid growth and high valuations but also helps reduce costs by focusing on operational efficiency and waste reduction. Investing in ESG provides greater access to capital markets at a lower cost of capital as banks and financial institutions are increasingly viewing investments through the ESG lens.
Furthermore, ESG excellence reduces transition risk by assisting companies to stay ahead of changes in regulations and stakeholder sentiment.
Across industries, there are nuances in terms of the interplay of factors that affect climate action. While stakeholders or investors would be critical in one, customer awareness and demands may drive change in others. Thus, to gain deeper insight across sectors, the article analyzed certain prominent pull factors, and their relative importance across sectors.
An analysis of the drivers pushing sustainability goals across industries reveals that pressure from investors and shareholders is a prominent driver among all industries barring manufacturing, oil & gas, and power and utilities. For example, more than 50% of the respondents from the oil & gas industry ranked pressure from national and international agencies as the most important driver, while factors such as investment in new opportunities were ranked as a prominent booster by respondents from industries such as financial services, and power and utilities.
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Organizations across industries are increasingly incorporating ESG considerations into their business decisions. Given the above-mentioned sentiments of organizations about the possibility and implications of India achieving its COP26 goals, it may be interpreted that organizations now have a strong understanding of the climate challenge and its impact on their operations.
Actions and goals arising out of pressure from customers and employees were significant drivers for industries such as automotive, manufacturing, consumer goods, and professional services. For long-term value creation, businesses are investing significantly in sustainability strategies. These are then communicated to investors through effective disclosures.
In this case, also, the organization’s ESG accountability expands to include both internal and external stakeholders. The survey reveals that the importance of sustainability is becoming more apparent as it begins to demonstrate tangible benefits such as increased revenue opportunities, reduced risk, improved public image, and reduced regulatory issues.
10 Five Reasons for Investing in ESG
- Reduced regulatory and legal interventions
- Top-line growth
- Attracting better investment
- Cost reductions
- Employee productivity uplif
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Most respondents ranked ease in the regulatory process and legal interventions as the most important reason for investing in ESG activities. The other two most prominent reasons for such investments include achieving top-line growth and attracting better investments; institutional and millennial investors see this as a pressing need. Some respondents from industries such as financial services, professional services, and metals acknowledged that a strong ESG proposition supports employee retention and raises productivity as well.
ESG investing in India has steadily gained traction over the last five years even though these efforts are still in their early stages. Inflows into ESG mutual fund schemes in India increased by 76% in 2021, rising from INR 2,094 crore in 2019–20 to INR 3,686 crore in 2021.
Notably, in 2020 India’s large asset management companies (AMCs) launched schemes with a clear focus on ESG. In stock indices, the NIFTY ESG 100 sustainability index outperformed the broader NIFTY 100 between 2020 and 2021.Pension funds have also begun to incorporate ESG factors to achieve stable, long-term, and risk-adjusted returns.
There are several reasons behind the better performance of companies with ESG portfolios. With their transparent accountability of ESG risks standing out as a notable factor, such companies of course also emphasize risk-adjusted returns.
Companies are aiming for value creation through these initiatives with an impact on:
(i) cost savings from efficient resource utilization;
(ii) long-term investment decisions;
(iii) an increase in social credibility and reputation;
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(iv) strong community relations; and
(v) improved governance
Conclusion
Increased awareness about climate change has pushed global organizations and stakeholders to consider bringing ESG parameters to the forefront of all major decisions. The horizon for inclusive and sustainable industrialization is likely to require retrofitting organizations to make them sustainable. However, the challenge surrounding sustainability is also multifaceted, often obstructing the true potential of organizations to achieve sustainable business goals.
(India CSR)
