As we flip our newspaper pages every day, we read that more and more companies are dancing to the tunes of ESG worldwide. It has been a hot topic for quite some time now and is here to stay much longer than we can expect. The ESG wave started in Europe, then touched many other countries and is now prevalent globally including India. ESG which represents Environment, Social and Governance is basically a sustainability approach of a company which sparked because of the real impacts of climate change seeping in and eye-opening episodes for Investors. Unpacking ESG, a simple acronym is much more complicated and companies are trying their level best to get these 3 terms right because it can severely affect a company’s bottom line. ESG is ringing the doorbells of a company with real risks and opportunities.
ESG approach if injected into a company’s culture can help build a resilient business model that can bring long-term profitability. ESG, the non-financial parameters can fetch big financial gains. If a company is not shifting to environment-friendly practices, does not have a suitable work-life culture for its workforce or is a breeding ground for bad governance practices, the investors clearly identify these as potential risks and step back to make an investment. On the contrary, positive news such as a company planning to reduce its carbon footprint, or having the best social wellness practices on the premises and having the perfect boardroom with the right mix of diversity, skillset and knowledge can work wonders for a company as it creates potential opportunities for investors to invest.
According to a Forbes article published in 2018, ESG investing is estimated to account for over $20 trillion in Assets under Management. A survey conducted by HSBC shows that almost half of the businesses in the survey had ESG strategies. HSBC also stated that when it compared ESG investments to non-ESG investments on parameters such as demand, stakeholder engagement, financial returns and reputation, the former performed 2% better. A survey by Morgan Stanley revealed that 70% investors believe that good ESG practices within a company can help to attain higher profits and make for ideal investments in the long run. As per the S&P Global Market Intelligence, 19 out of 26 ESG exchange-traded funds were observed to be less volatile and performed better than S&P500. Global ESG fund assets have witnessed a remarkable rise from $ 1 trillion in 2019 to $ 3 trillion in 2022. In 2018, the consumer sentiment in the US wherein 48% of consumers were willing to change their consumption habits to contribute to the environment turned into whopping revenue of $128.5 billion by way of an increase in the sale of sustainable consumer goods. According to a global accounting and advisory firm, Moore Global, which studied 1,262 big companies from different economies, laid out that sales in ESG-focussed companies grew at a double pace than those of non-ESG-focussed companies in the last 3 years and saw a 10% rise in revenues. The research also revealed that almost 85 % companies that embraced ESG reported better customer retention and better potential to attract external investment. The Bloomberg Intelligence Head of ESG and Thematic Investing has analysed the future of ESG assets which it estimates will account for more than one-third of global AUM by 2025 exceeding an amount of $53 trillion.
Infusing ESG has also proven to be cost-effective for companies. Imagine if a company powers its premises’ electricity through solar, it can save so much on electricity bills. If for example, a chemical company has stringent health and safety measures in its factory premises, it can surely save the company from a potential disaster. Not to forget, the Bhopal Gas Disaster could have been avoided if health and safety checks were effectively put in place. It was an accident which was caused by pure negligence. Had the company taken the safety element seriously, it would not have had to pay a hefty amount of Rs. 715 crores as ordered by the court. Bad governance has already cost companies heavily where billions have gone for a toss and organisations should learn from the mistakes of others.
A push from the regulators to pursue ESG reporting is like validation in this direction. Addressing ESG has never been as important to a company as it is at this point in time. An important aspect of governance is the board’s long-term vision of a company for the next 50 or more years. A thoughtful board will not sacrifice essential adaptation for short-term benefits. ESG has now become a tool to lower the risk and heighten the opportunity. It will definitely create value for your business. Investors all across are driven by the principle- who cares wins.
In addition to enjoying the satisfaction of contributing to a social benefit, ESG investing can earn you some extraordinary bucks. It’s time to shoot out the orthodox view that socially responsible investing is only social in nature.
Learn more about the risks and opportunities that ESG carries on its shoulders through our famous Directors’ Institute ESG Expert Certification and Directors’ Institute- World Council of Directors.