ESG: The Key To Securing A Sustainable Corporate Future

The concept of ESG (Environmental, Social, and Governance) has come a long way over the last decade. What was once a buzzword in the sustainability movement is now an indispensable element of corporate strategy. The 21st century demands that businesses be accountable for their role in securing a sustainable and equitable future for the planet. As such, corporations worldwide are proactively conducting material assessments and integrating ESG principles into their operations.

In India, much ESG activity has been driven by the ‘E’ component, with actions taken in response to climate change. The term, however, places equal emphasis on social factors, such as promoting gender equality and the social impact on communities, as well as on strong governance practices, including executive compensation, diverse board representation, and transparency in management.

Transparency and Accountability

There is a growing trend among stakeholders to evaluate the social responsibility of companies and how they impact the planet. Many countries, including India, have introduced regulatory requirements mandating companies to disclose their ESG practices. In 2019, the Ministry of Corporate Affairs (MCA) issued the National Guidelines on Responsible Business Conduct (NGRBC) to encourage businesses to become responsible actors in society. The Securities and Exchange Board of India (SEBI) also amended an existing regulatory requirement in 2021, mandating the top 1,000 listed companies by market capitalisation to publish the Business Responsibility and Sustainability Report (BRSR).

The development of sustainability reporting frameworks, like the Global Reporting Initiative and the Task Force on Climate-related Financial Disclosures, has also contributed to the trend. Thus, corporate leadership is now more invested than ever in planning and executing their ESG vision as part of the overall business strategy.

Creating Long-term Value

ESG is becoming increasingly relevant to investors, causing a shift towards 'sustainable investing'. This approach considers not just financial returns but also the social and environmental impact of investments. Large investors, like True North and EverSource Capital, are monitoring their investments from an ESG lens and actively discussing environmentally impactful investing and sustainability. As per a report by Benori Knowledge, sustainable investments made by Indian private equity and venture capital firms are expected to skyrocket to $125 billion by 2026, with a CAGR of 46% over the next five years. In addition, ESG ratings agencies have emerged to assess performance, providing investors with an objective basis for evaluating potential investments.

Failing to close this ‘sustainability gap’ can pose financial risks for companies and make it difficult for them to attract investors in the future. In contrast, companies that prioritise ESG are better positioned to create long-term value for their stakeholders and gain access to investment capital.

ESG, A Priority for the Gen-Z

The younger millennials and the Gen-Z form a demographic that has grown up with access to information at their fingertips and awareness of global issues such as climate change and social inequality. Being a generation of self-driven individuals who value collaboration, diversity, and socio-environmental impact, they recognise the importance of ESG commitments and seek out companies that share these values.

According to a recent survey conducted by asset management firm Amundi and the Business Times, 82% of Gen-Z and nearly two-thirds of young millennial investors have exposure to ESG investments, the highest percentage among all age groups. This indicates that the younger generation is not only aware of ESG principles but also willing to put their money where their values lie. The International Institute for Sustainable Development predicts that the market for ESG-mandated investments will reach $160 trillion by 2036, up from $30 trillion in 2018.

ESG principles not only help build reputation but also attract and retain top talent. Young professionals are gravitating to action-oriented organisations that implement sustainable business practices, as they want to work with companies who prioritise their social and environmental impact alongside financial success. According to recent studies, approximately 70% of Gen-Z respondents emphasised the importance of working for organisations that prioritise ESG principles. Additionally, nearly 20% of those surveyed listed ESG among the top five factors influencing their decision to join or remain with their current employer. Good governance and sustainability are key for organisations looking to win over the new generation and secure the talents of tomorrow.

Overcoming Hurdles

The ESG landscape is fraught with significant challenges, the lack of credible data being a major hurdle. Inconsistencies between company-supplied data and actual business practices can lead to accusations of greenwashing. Due to the absence of standard reporting frameworks, companies must unlearn and re-learn best practices and implement rigorous systems to have credible data audited by third parties.

Furthermore, high integration costs deter many businesses, particularly emerging market companies in low-income nations, from prioritising ESG commitments. Driving productivity and protecting margins take centre stage. Rising inflation also affects the ability of organisations to adopt a long-term approach, with ESG often not being prioritised.

Gaining A Competitive Edge

Despite these challenges, forward-thinking corporate leaders are raising the bar by dispelling the notion that environmental sustainability comes at the cost of strong financial performance. Instead of viewing ESG as corporate “responsibility”, businesses are rethinking their everyday decision-making through an environmental and social lens. By doing so, companies are able to overcome many of the challenges outlined above and gain a competitive advantage, securing sustainable supply chains and attracting investment capital. Currently, many companies view ESG as a burdensome cost centre, leading to pressure from management to reduce costs and ignore long-term change. However, when companies embrace ESG as a scalability enabler and innovation engine, they can leverage it to accelerate their businesses while also creating and protecting value in society.

In a rapidly changing world, where transparency and accountability are demanded by stakeholders, and where sustainability and social responsibility are integral to long-term success, the adoption of ESG principles is no longer a matter of choice but a necessity for companies that wish to adapt to the times & have long-term sustainable operations.

(The author is Sustainability Director, Tetra Pak South Asia)