ESG FRAMEWORK

ESG is the umbrella term for sustainable and responsible finance components. It is a framework considering environmental, social, and governance factors alongside financial factors in the investment decision-making process. It is also a process to assess which companies perform/score on each of the factors: E, S & G, and determine if it is a viable investment. ESG stands for Environmental, Social, and Governance. In a business context, ESG often coined as sustainability is about the company’s business model, i.e., how its products and services contribute to sustainable development. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

While ESG has been around for years, what is the reason for its sudden popularity? In recent years public awareness of climate change, environmental and social problems have increased dramatically, partly because its effects are becoming more pronounced. Even the former skeptics now realize that these problems exist and demand solutions. Companies and investors, as well as governments and regulatory authorities, now highly value sustainable management. With the growing awareness and demand for climate protection and social awareness among consumers, consumers are demanding high standards from companies in terms of sustainability and quality of employment. Therefore, the introduction of environmental, social and governance (ESG) measures is more important than ever for companies and businesses of all sizes to survive in the present and prepare for the future.

In recent years, ESG Investing has attracted a lot of attention and popularity from investors, especially institutional investors. ESG investments refer to investments that prioritize environmental, social, and governance (ESG) factors or outcomes. The benefits of tackling ESG issues proactively go beyond appeasing institutional shareholders. A strong ESG strategy can unlock access to large pools of capital, build stronger corporate brands, and drive sustainable long-term growth for the benefit of businesses and investors. It helps companies get into new markets and grow in existing ones. ESG can also reduce costs substantially. If you are more resource-efficient, water-efficient, have less packaging, you will generally have a lower unit-cost structure. With ESG companies can reduce the risks from adverse government action. It also helps companies attract and retain quality employees, increase employee motivation and overall productivity. It can increase ROI by capitalizing on more promising and sustainable opportunities (renewable energy, waste reduction) and help companies avoid stagnant investments that may not pay off due to long-term environmental issues (For example, a massive depreciation in the value of tankers).

Having understood the importance of ESG, the next critical step would be to implement and execute ESG strategy. Following are a few steps that can be adopted to implement the ESG strategy at business:

1. To maintain alignment with a company’s long-term business strategy, a strategic assessment needs to be done.

2. Companies that decide to move forward with ESG implementation will need to establish clear decision rights, accountabilities, and oversight.

3. The quality and detail of the data collected from the onset is key to informing decision-making.

4. Once company leaders have completed their inventory of initiatives and developed a system for collecting and validating ESG data, they need to identify which data points, events, goals, or accomplishments to disclose. It should include assessments of which ESG data has already been disclosed (if any), any applicable legal disclosure requirements, and any legal risks or benefits associated with the proposed disclosure.

5. In this, the companies will need to identify the most important communication channels in reaching those audiences.

On one hand, it has been demonstrated that companies performing on ESG practices have higher financial growth and optimization, lower volatility, higher employee productivity, reduced regulatory and legal interventions (fines and sanctions), top-line growth, and cost reductions. On the other hand, companies that performed poorly on ESG noticed a higher cost of capital, higher volatility due to controversies and other incidences such as labor strikes, fraud accounting, and other governance irregularities. When a company does not score well in ESG principles, especially when compared to its peers in the same industry, some will react by divesting.

Businesses of all sizes must prioritize ESG for both short-term and long-term benefits, and constantly adapt to changing regulations and the needs of various stakeholders otherwise they will be costed out of business. Businesses must stay up-to-date with vast amounts of data and frameworks, reduce costs and manpower by implementing their ESG strategies. The rewards also lie in accelerating growth, reducing costs, being effective, attracting talent, and aligning with the consumers of tomorrow, showing why ESG is more important today than ever. Companies must also have access to timely information on their ESG performance that enables them to maintain healthy relationships with investors. ESG integration has proven to be a smart move not only for businesses, but also for the environment, society, and humanity in general.

- Harshal Naidu, Tavishi Garg