Why incorporating Environmental & Social ESG factors is imperative for your business.

The growing evidence that sustainable corporate practices link closely to performance is focusing investor attention on ESG scores.

Consumers are now demanding high standards of sustainability and quality of employment from businesses. Regulators and policy makers are more interested in ESG because they need the corporate sector to help them solve social problems such as environmental pollution.

Obviously, different things are important to a consumer goods producer and a software services provider. But many companies want to address the ESG factors that are material to their industries, and there is an increasing expectation of corporations to not only maximize shareholder value but take a broader role in society. For instance, if you are a consumer goods company, it’s increasingly important for you to offer sustainable products. You would see chocolate providers, for example, including fair-trade products and sustainable options in their assortments. And research shows consumers are now prepared to pay a premium for that.

The imperative for incorporating ESG factors has been mounting for two decades but has been growing on an accelerated path over the last few years. Key trends which are being witnessed across sectors include:

• Growing evidence of climate change: Increasing frequency of natural disasters, supply chain disruptions and resource constraints and their economic impact has been fundamental in giving impetus of integration of ESG to futureproof business.
• Product stewardship: Businesses have been under increasing pressure from different stakeholders to be responsible for the product and the associated supply chain. Stakeholder activism, investor concerns, risks associated with customer awareness has been at the core of developing ESG metrics for business resilience and focus more on aspects such as waste management, extended producer responsibility and environmental footprint.
• ESG moving to core: Unconventional threats from climate change, environmental challenges and social awareness together have created the demand for integration of ESG factors into proactive business strategy.
• From shareholder to stakeholder: Conventionally, businesses catered to specifically investors and shareholders and drive profits. However, the impact of other non-tangible parameters on profits is clear now and hence the focus has shifted from the shareholder to a stakeholder model to account for diverse needs of different stakeholders through enhanced ESG evaluation to ensure business resilience.

In this global phase of transformation coupled by volatility and uncertainty for the businesses, ESG framework provides businesses long term value by holistically safeguarding profits, people and the planet. Imbibing ESG factors into business therefore becomes necessary as it goes beyond corporate responsibilities and focus on holistic material issues to build resilience in short medium and long term. These aspects vary basis the industry of operation, business model, geography, scale of operations, supply chain, investor base, core values and business strategy of the organization.

Creating a long-term value goes much beyond mere financial profit and loss but we need to look at the bigger picture. Integrating non-tangible factors and measuring the impact created helps in future proofing of business with respect to the risk that cannot often be measured. Therefore, companies are moving from non-financial reporting to integrated profit loss statement which attempts to correlate or monetize the positive and negative impacts of the business operations and products through a range of capitals.