ESG or Environmental, Social and Governance was first mentioned in 2004 by an article published in association with the United Nations. It was later included in the UN’s Principles of Responsible Investment (PRI) in 2006. 16 years have passed, and there is still an ambiguity in the approach towards it. Many organizations still believe that addressing ESG issues causes adverse effects on financial returns.
This blog post aims to efface your apprehensions about ESG and turn your “maybe” into a strong “YES”.
ESG has value.
Globally, over $35 trillion worth of assets is said to be monitored under a microscope for their non-financial performance today. That is a 55% increase since 2016. This value is expected to cross $50 trillion by 2025. An article for the Journal of Applied Corporate Finance observed that companies which engage in ESG issues hold a competitive edge in the market.
According to a study conducted by the CFA institute, 35% of investors have utilized ESG to advance their financial performances. Even small undertakings such as paperless reporting and eliminating single-use plastics across the workplace can contribute to the improved bottom line and Return on Investments. To take it a step higher, companies can track some key parameters like supply chain, energy consumption, waste management, etc. The big picture guarantees reduced volatility increased productivity and employee retention, reduction in legal liabilities and reduction of costs in areas such as resource consumption, energy consumption, and waste management.
ESG is not just for large corporations
Whether you are an investor, large company, SMB or start-up, you are not exempted from the impacts of ESG performance; ESG is no longer just a framework or a tool for investors and organizations to report. ESG performance is now keenly observed by employees, governing bodies and the clientele as well. The pandemic showed the world that we do not govern the planet, but are simply custodians of the planet.
SMBs and start-ups often hesitate to invest in ESG because they fear that they do not have sufficient resources and may not enjoy long-term benefits, however, a good ESG performance will definitely aid SMBs and Start-ups in attracting the attention of sustainability and socially conscious investors without the bureaucratic procedures followed in large organizations.
ESG is not just about the environment
When most people think about ESG, they only think about its environmental aspects. ESG extends to social and governance too, which tend to be overlooked. Social parameters include, but are not limited to, diversity and inclusion, equity, and occupational health and safety. The governance aspect indirectly affects the financial performance of the organization. It includes very critical areas such as the management of risk, taking precautions against fraud and even misuse of company data and cybersecurity. Large corporations tend to give more weight to governance while collating ESG data. The governance aspect helps identify risks before they impact the organization and eliminate unnecessary additional costs to the company.
ESG makes company operation sustainable
A well-designed ESG program showcases the organization’s commitment to risk management and sustainability. Looking for short-term returns from an ESG program will demotivate the company from looking at the vision ahead. The long-term benefits include –
- Reduction in green taxes
- Attraction of millennial investors (making up about 43% of total investors)
- Reduced lost time incidents and fatalities
- Reduced work-man compensation
- Mitigation of business risks
- Sustainable supply chain
- Good quality hiring
- Lower Attrition rate
- Support of stakeholders
- Legal compliance
- Strong data privacy
- Eliminate quality issues
- Reduction in energy consumption and subsequently expenditure on the same
There are so many more long-term benefits that are not visible in plain sight, and it is smart to keep these issues in mind while making business decisions. Short-term returns might not sustain the business in the absence of a good ESG program.
ESG Builds Customer Loyalty
Accenture conducted a survey in 2021 on consumer trends. According to this survey, 50% of consumers have realigned their priorities against unsustainable brands. The covid-19 pandemic gave birth to thousands of green businesses across the globe. Adapting to the market demand and transparent ESG disclosures will retain customers and generate new business based on the company’s reputation and recommendations. We must keep in mind that conscious customers are demanding to know how businesses are contributing to the environment and society.
ESG gives you a competitive edge
A recent study shows that 64% of Americans are willing to spend more on brands that promote sustainable products. Building a brand image is no longer just about quality products, but the quality of the labor conditions, environmental protection, diversity and inclusion as well.
ESG is inevitable
29 countries across the world have made ESG reporting mandatory for top publicly listed companies. Many large investors conduct an ESG evaluation before investing. It will not be long before more countries will make ESG reporting mandatory, and the requirement extends to all businesses. It is better to be prepared and stand out as a business to regulators, investors, customers and employees. IntellaQuest’s suite of applications are perfectly suited to help you to gain the necessary insights into your organization’s performance, set and monitor meaningful KPIs for organizational improvement, manage your integrated management systems and regulatory responsibilities, and easily report key information to the right stakeholders at the right time – let us be your partner as you begin your ESG journey.
References
- https://en.wikipedia.org/wiki/Environmental,_social,_and_corporate_governance#:~:text=The%20term%20ESG%20was%20popularly,at%20the%20invitation%20of%20UN.
- https://www.economist.com/leaders/2022/09/29/the-fundamental-contradiction-of-esg-is-being-laid-bare?gclid=Cj0KCQiAsoycBhC6ARIsAPPbeLtNqDEV4ePG47hnViDZyNFE9ej7zjkpMet1F7kbxLxCmEQb8BWJnnsaAvFNEALw_wcB&gclsrc=aw.ds
- https://www.techtarget.com/whatis/feature/5-ESG-benefits-for-businesses
- https://www.gobyinc.com/five-pervasive-myths-surrounding-esg/
- https://www.forbes.com/sites/betsyatkins/2020/06/08/demystifying-esgits-history–current-status/?sh=148b7c762cdd
- https://www.forvis.com/alert-article/2022/04/debunking-esg-myths
