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Men in Suits

Why is it necessary for CEOs of Big Corporates and MSMEs to learn

Updated: Jan 4, 2023

Promote and implement ESG principles in organizations at every level.

A CEO is said to be the most important person in the company who gives the company a strategic direction. The mission, vision, strategies, implementation, and success of a company revolve around the decisions made by the CEO. And as they say, with great power comes great responsibility. The CEO is expected to adapt to emerging global trends to the highest benefit of the company.

ESG (Environment, Social, and Governance) principles have been the talk of the town for quite some time now, especially after the pandemic and the need to incorporate ESG principles in organizations at every level has been emphasized time and again. Be it any industry, small or large, ranging from manufacturing, textiles, oil & gas or real estate, every industry is entangled with ESG concerns. ESG has become an inextricable part of how a business should be conducted which no more is just an ideal way of doing so but an essential way of doing so. Let’s understand, why doing so is the need of the hour and why CEOs must embrace ESG within their companies.

A boom in Investor demand

Investors today have become more aware of the terrorizing effects of climate change on the globe and they thus believe in conscious decision-making. They realize the magnetic impact that corporations can have on climate change and society if they do not integrate ESG-friendly practices within their organization. This is not just a philosophy but is completely backed by facts and figures. A significant rise is observed in ESG-oriented investing. According to a study by McKinsey, sustainable investment now tops $30 trillion globally which is 68% more since 2014. And companies with the highest ESG ratings have outperformed companies with the lowest ESG ratings by around 40%.

It can be observed that having a suitable ESG proposition is only going to heighten value creation for the company and is now in fact a financially material aspect. Because a fundamental principle of business is to capture the market where the demand is high. Thus, if the investor demand is high for sustainable investment, having a great ESG proposition is a goldmine for companies.

A shift in customer preference

Research by McKinsey has highlighted that around 70% of the consumers have stated that, if a choice had to be made between a ‘non-green’ product and a ‘green alternative’, they would choose the latter even if they had to shell a little more from their pockets. This is reflective of a sentimental shift in the purchasing patterns of customers who possess great value for sustainability & ethics. Thus companies who are willing to innovate and create green alternatives for their existing products are more likely to attain financial growth in the near future.

Regulations and growth expansion

Plenty of regulations, laws, and penalties in place for adhering to environment-pro actions, health & safety of employees, stringent corporate governance and ESG reporting have formed a substantial background for companies to inculcate ESG principles in their system leaving them with the only way forward. Naturally, when companies lawfully adhere to these regulations, they save huge bucks on fines, penalties & potential litigation and the regulatory bodies easily clear their way to obtain necessary permits, licenses and incentives, accelerating the growth of companies hassle-free. Government subsidies, awards, and accolades also incentivize the companies to inculcate ESG practices.

A positive work culture

Developing attractive social wellness programs for its employees is the best way that companies can opt to express that they care and value the people who work for them. And in return, a motivated, satisfied and active workforce can contribute their skills to the best of their capabilities to help the company prosper and flourish in a true sense.

Reduction in operational costs

According to MSCI Inc, companies with high ESG scores experienced lower costs of capital, lower equity costs, and lower debt costs as compared to companies with poor ESG scores. Renewable energy is not only clean but also cheap. And a reduction in water usage and waste management is not cost-intensive but cost-effective. The usage of resources in an efficient manner can impact the profits of the company positively. On the contrary, the cost of ignoring ESG can be pretty high.

Will help to streamline capital allocation in sunrise industries

When the CEO of a company has an ESG perspective, his decisions with regard to capital allocation shall also flow in the direction of sustainability. The sustainable sectors are bound to give more returns than the non-sustainable ones which will increase the investment returns for the company and strengthen its financial position in the market.

Scaled-up reputation

Companies that have a good ESG rating are given a thumbs up by market analysts, investors, government, and communities. They enjoy a strong reputation at the national/international level creating a legacy for themselves.

It can thus be concluded that having ESG practices in a company’s operations creates long-term value for the company and matters to the company in many ways. It now depends on the vision and perspectives of the CEOs on how they make an effective ESG integration making the planet and society a better place to live in. The ESG wave is for a reason and the CEOs should act like opportunists and capitalize on this opportunity.

However, to drive the ESG agenda, the CEO first needs to understand the values associated with ESG and define what ESG means to his company. There are a lot of factors that are needed to be considered by the CEO to lay out the relevance of ESG to the company and in the creation of a suitable ESG program. Some of these factors are the size of the company, its emissions, resources available, performance of competitors, stakeholders' interests, etc. He needs to weigh and assess various parameters to implement ESG principles effectively in the best interests of the company.

You can now make a valuable addition to your board journey through our recognized Directors’ Institute- World council of Directors course. Our ESG Expert certification will help you to better understand these factors in a detailed manner paving a way for you to become a globally recognized ESG leader.

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