The pandemic showed us that sustainability is about much more than just addressing environmental issues. It is about building resilience into infrastructure, which is where the Environmental, Social, and Governance (ESG) discussion is brought to the forefront.
The impact created by corporations is receiving considerable social, corporate, governmental, and consumer attention. The Securities and Exchange Commission (SEC) of the United States recently declared that corporate disclosures on Environmental, Social, and Governance (ESG) concerns will be a top focus. Investors want a solid ESG proposal that protects their interests as well as the company’s performance. The narrow line between doing good and making money is rapidly becoming blurred. The pursuit of the public interest and attempts to optimise the bottom line, according to the SEC, are complimentary.
What is ESG?
E is for Environmental: Environmental issues pose one of the most significant problems of the twenty-first century. The way businesses utilise energy and manage their environmental effect has far-reaching implications for society and the world.
S is for Social: The social effect may not be apparent at first, but it is an essential component of the ESG framework. The way a company fosters and nurtures its employees and culture will have an impact on the larger community. Their inclusiveness and heterogeneity will pave the path for a more sustainable future.
G is for Governance: This criterion is divided into two sections:
One is to keep ahead of infractions by maintaining openness and industry best practices, as well as engaging in communication with authorities.
The internal system of controls, policies, and procedures for governing and making good decisions is the other.
Why Is ESG Important?
According to the European Green Deal, all member countries will have circular economies with net-zero emissions by 2050. While the European Union (EU) has a head start, the United States has ambitions to decarbonize the economy and achieve net-zero emissions by 2050.
Companies are already bearing the financial repercussions of failing to act on sustainability, as many nations have enacted policies such as carbon taxes, and the financial and banking industries have included ESG principles in their criteria. The only option for stakeholders to avoid bad financing conditions and exclusion from capital markets is to demonstrate proof of strong sustainability and ESG policies.
Furthermore, the private equity market incorporates sustainability and environmental, social, and governance (ESG) principles into its portfolio strategy. Private investors have recognised that investing in firms with a strong and credible ESG strategy improves ROI and lowers financing and revenue risks.
ESG problems are increasingly being considered by investors as a means of mitigating investment risks. ESG performance ratings and reports demonstrate to investors a company’s efforts to reduce risks and achieve long-term financial benefits.
Why is ESG’s importance growing?
There are several parallels being drawn between the unknown hazards of a pandemic and the climate crisis, both of which have a significant impact on the global economy. As a result, many investors and politicians have realised that there is a greater need to expedite investments and development in enterprises that prioritise ESG. After all, our society is no longer just reliant on the government, but also on well-functioning enterprises that satisfy its demands, which include, job creation, equitable growth, natural resource protection, and consumer protection.
In the United States, ESG-focused funds have more than doubled from USD 21.4 billion to USD 51.1 billion, an almost tenfold rise from USD 5.4 billion in 2019. Managed sustainable fund assets in Asia, excluding Japan, nearly quadrupled to USD 36.7 billion in March 2021 from the previous year.
The pandemic has also made corporate governance a very nuanced task, which requires making important decisions related to business strategies, employee well-being, risk mitigation and managing stakeholders in an unprecedented environment.
Benefits of ESG
There are several advantages for businesses to investing in the development and execution of robust ESG initiatives. A credible ESG proposal may contribute significantly to the creation of substantial commercial value across the enterprise.
E: Sustainable practices attract more customers, allow better access to resources, lower energy and water consumption, and therefore also can reduce operational costs.
S: Sustainable practices lead to greater social credibility, attract talent, boost employee morale, and build stronger community relations.
G: Sustainable practices may lead to government support, subsidies, overcoming increasing regulatory pressure, and better investor relations, e.g., in the form of better loan conditions or lower capital costs.
What Does This Mean for Businesses?
Businesses must implement immediate sustainability and ESG initiatives to solve the primary problems of net-zero and circularity. Those who consider ESG factors will be valued higher than those who do not.
The automotive and manufacturing industries will likely suffer the most problems, particularly in terms of supply chains. They must invest in innovative product development to produce new technologies that supply the market with climate-neutral and circular solutions. They require strong sustainability and ESG practices to be more adaptable during a crisis.
It will be up to the leaders to drive these ESG objectives. Businesses cannot aspire to have the industry-wide influence that we require without aggressive leadership. If forward-thinking C-level executives want to see strong bottom-line returns from their strategic business decisions, they must focus on sustainability and make decisions for the greater good.
The good news is that firms may build sustainability and ESG strategies that meet net-zero and circularity goals whilst also being profitable and gaining access to funding through banks and capital markets. JPIN’s sustainability and ESG specialists assist businesses in developing net-zero and circularity roadmaps that safeguard shareholder value, generate possibilities for development and innovation, and lay the groundwork for long-term success.
Is ESG for businesses of all sizes?
While major corporations can afford to have dedicated teams to oversee and profit from ESG measures, small companies may benefit from speedier decision-making, flexibility, and greater interaction with their consumers, which allows them to better understand their requirements.
Small ‘green’ initiatives initiated by companies, such as converting to greener packaging, digital receipts, the use of renewable energy, and smart waste management, may go a long way toward helping them save money and reduce their carbon footprint.
Small and medium-sized enterprises (SMEs) with a strong ESG emphasis will be in a better position to attract interest as investors want to invest more in companies with high ESG standards. Having strong ESG standards reduces the risk profile of SMEs by increasing top-line growth and decreasing operational and regulatory issues.
Contributes to top-line growth
Businesses with a strong ESG strategy find it simpler to enter new markets and extend their operations in existing areas. Governments enable access by offering licences and approvals to such businesses.
According to GreenPrint’s Business of Sustainability Index report (2021), 75% of Millennials in the US are willing to pay more for an environmentally sustainable product, and 77% of the overall sample size is concerned about the environmental impact of the products they buy.
Costs are reduced as a result of this
Companies that move to more sustainable manufacturing processes tend to be more efficient and cost-effective. Nestlé is one such example, having indicated that it will invest up to $2.1 billion by 2025 to transition from virgin plastic packaging to food-grade recycled plastics, as well as create other sustainable packaging alternatives. This would not only help them reduce their carbon footprint, but will also save them money on non-compliance charges in countries with tougher restrictions regarding the use of plastic packaging.
Effective regulatory compliance and stakeholder management
Depending on the marketplaces in which they operate, all firms are impacted by one or more types of rules. Businesses that implement effective ESG standards, particularly in governance, face less scrutiny from authorities and have greater operational independence. They also face less pressure from campaigners, labor unions, and other groups concerned about climate change. Consumers like such brands as well. For example, in 2017, Starbucks launched the ‘Starbucks China Parent Care Program’, which provides health insurance to nearly 10,000 parents of Starbucks employees in China. It was viewed as a strategic decision since Starbucks sought to expand in China despite the escalating trade spat between the United States and China.
Recruiting top personnel and enhancing employee productivity
Studies show that strong organisations with high ESG ratings recruit superior people and have higher retention rates. Employees feel proud when their company has a defined environmental objective, and the younger generation chooses to work for organisations with higher societal obligations. According to a 2016 Cone Communications report on Millennial Employee Engagement, 64% of Millennials evaluate a company’s social and environmental responsibilities when considering where to work.
How should you start working on your business’ ESG policies?
When deciding on ESG policies, a company must examine a variety of variables. To begin, it must examine where it is in terms of implementing ESG measures. Is it just getting started, or has it already begun to take steps toward ESG? This will assist in answering certain essential questions, such as:
1) Determining the most critical areas where ESG needs to be a focus
2) Conducting an assessment among your investors, board, employees, and customers which helps to identify key priority areas for ESG
3) Learning about different ESG standards, frameworks and policies
4) Allocating resources and defining your strategies with accountability measures
If your business has already started developing ESG measures and gone beyond the above stage:
1) Sign up for several relevant standard and reporting frameworks and look for your company’s industry-standard benchmark.
2) Run your ESG measures via several internal assessments to ensure they fulfill the needed requirements.
3) Ensure that your ESG plan adheres to the needed operational and governance model as indicated by investors, and current compliances.
4) Maintain your knowledge of evolving rules and the demands of your stakeholders.
5) Engage with other businesses, groups, regulators, and stakeholders to forge alliances and advance toward larger impact and improved ESG practices.
Businesses that are serious about ESG policy make it a priority for top management and attach remuneration to ESG metrics. According to a Pay Governance survey conducted in January 2021, 29% of organisations have integrated ESG measures in their incentive compensation programs, up from 22% in 2020. JPIN is making committed efforts to make the world a more hospitable, equitable, and greener place.
Is Edtech Still a Money Magnet for Investors?
The Indian industries pivoted to digitisation, and Edtech was no exception. Edtech…Read More
Indicators of a Viable Investment Opportunity
There are several young investors seeking viable investment opportunities, but amongst the…Read More
India- The Coming-of-Age Story
Since its independence, India has taken a giant leap from being an…Read More
From Start-Ups to Scale-Ups
Scaling is when a company’s income grows significantly without them spending a…Read More
Gaining Traction and What it Means For Start-Ups
The rate at which a business model acquires monetizable value from its…Read More
Understanding Decentralised Finance and the Changes it Has Beckoned
Decentralised Finance (DeFi) is likely to have a substantial influence on how…Read More
Fundamentals of Pitching: What the founders of Startups ought to do
Fundamentals of pitching- take note, start-up founders! Pitching: Everyone pitches for something…Read More
WealthTech: An innovative disruptor
Robo-advisors, micro-investment services, portfolio management tools—many consider wealthtech a real game-changer. It…Read More
ESG: Turning theory into action
The pandemic showed us that sustainability is about much more than just…Read More
NFTs – Are they iconoclastic or mainstream?
What are NFTs? NFTs are digital assets that represent objects such as…Read More
Play-to-earn: Signalling a paradigmatic shift
What is it? Play2Earn (play-to-earn) games are a type of gaming in…Read More
Covid 19, a petri dish of emerging startups
There is no doubt that the covid-19 pandemic has injured the world’s…
5 mins. Read
The Rise of Startup Ecosystems
Startup ecosystems are springing up in all corners of the world and…
5 mins. Read
A Passage to India: JPIN Venture Catalysts on how they’re helping...
JPIN Venture Catalyst Ltd was the Gold Sponsor for our Future Forward: UKBAA…Read More