Environmental, Social and Governance (ESG)

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Author: Kesavarapu Naimeesha

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Living in a world where everything is instant and convenient we often take pride in our ability to achieve things quickly. However, can you imagine what the world would look like in one hundred years? It is scary, right?

Preserving our planet and passing it on to future generations is humanity’s most significant accomplishment. he contemporary approach to this challenge involves the implementation of ESG Principles—Environmental, Social, and Governance factors—which play a vital role in helping businesses establish sustainable and ethical practices for the future.

The Environmental factor prompts companies to prioritize crucial areas such as global warming, carbon footprints, and climate change. As an example, in 2023, Microsoft proudly announced its status as carbon negative, having removed more carbon dioxide from the atmosphere than it emitted. A survey conducted by PwC India revealed that 51% of India's top one hundred companies have voluntarily started disclosing their carbon emissions, with 31% setting net-zero targets for 2030 and 2050. These targets are driving companies to adopt innovative technologies and renewable energies, enabling them to implement sustainable operating procedures and gain a competitive edge. Another compelling motivation for firms to prioritize sustainability is the finding from a Harvard Business Review article, which states that companies investing in sustainable practices see an average internal rate of return of 27% to 80% on their low-carbon investments and generate 18% more profits than their peers.

According to Colleen Honigsburg, "Fundamentally, social impact is anything that affects people, and that is an infinite number of things." Within the context of a firm, "people" refers to stakeholders and factors such as inclusivity, fair wages, safety, and the impact on the communities in which it operates are key indicators of people's satisfaction with the company. A survey conducted by Economist Impact in 2022 revealed that only 36% of companies had incorporated social impact into their corporate strategy, as opposed to 47% for environmental impact. This disparity may stem from executives' lack of clarity on how to effectively address people's concerns, which can be a complex web of individual expectations. Nevertheless, companies should prioritize addressing these issues today to reap long-term benefits.

The governance factor of a company depends on its management, internal policies, and compliance with regulations and industry standards. According to the 2023 Corporate Governance Study by MSCI, companies with high governance scores saw a 12% reduction in stock price volatility and an 8% increase in returns on equity (MSCI, 2023), demonstrating the significant influence of good governance on a firm's growth.

In a survey conducted by the CFA, 73% of respondents indicated that they take ESG (environmental, social, and governance) factors into consideration when making investment decisions. Non-financial elements such as ESG offer investors a holistic perspective of the company, empowering them to evaluate risk factors and growth opportunities with greater precision. As a result, the use of sustainability reporting standards such as the Sustainability Accounting Standards Board (SASB) is gaining significance, encouraging companies to prioritize ESG initiatives.

Embracing ESG is not just a passing trend, but a vital aspect of modern business strategy that shapes the future of corporate responsibility and sustainable development, benefiting firms in the long term. It is high time for all companies worldwide to recognize this and actively work towards it.

References:

  1. (2023). "Microsoft becomes carbon negative: Our next big sustainability milestone." [Microsoft Blog](https://blogs.microsoft.com/blog/2023/01/10/microsoft-becomes-carbon-negative-our-next-big-sustainability-milestone/)
  2. PwC India. (2023). "Sustainability Reporting Survey: Indian Companies’ Carbon Footprints and Net-Zero Targets." [PwC India](https://www.pwc.in/en/publications/sustainability-reporting-survey.html)
  3. Harvard Business Review. (2023). "The Competitive Advantage of Sustainable Practices." [Harvard Business Review](https://hbr.org/2023/03/the-competitive-advantage-of-sustainable-practices)
  4. Honigsburg, C. (2022). "Understanding Social Impact: Beyond the Basics." [Journal of Social Impact](https://www.journalofsocialimpact.org/colleen-honigsburg-understanding-social-impact)
  5. Economist Impact. (2022). "Corporate Strategy and Social Impact: A Survey." [Economist Impact](https://impact.economist.com/corporate-strategy-social-impact-survey-2022)
  6. (2023). "Corporate Governance Study: Impact on Stock Volatility and Returns." [MSCI](https://www.msci.com/research/corporate-governance-study-2023)
  7. CFA Institute. (2023). "ESG Factors and Investment Decisions Survey." [CFA Institute](https://www.cfainstitute.org/en/research/esg-survey)
  8. (2023). "Sustainability Accounting Standards Board: Framework and Reporting Standards." [SASB](https://www.sasb.org/standards/)