The business case for ESG – ET EnergyWorld

There has been a paradigm shift from the earlier belief that businesses exist solely for maximization of profits and providing returns to shareholders. A robust ESG framework has become just as important for investors, consumers, suppliers and employees to measure the success of a business.

World over, people are supportive of businesses that align with their values and demonstrate a strong commitment to social and environmental issues. This has led to companies to adopt more responsible practices, such as reducing environmental footprint, promoting diversity and inclusion, and addressing social challenges.

In fact, ESG is today much more important than ticking boxes. In the interest of long-term value creation, while quantifying and measuring environmental, social and governance (ESG)-related activities is vital, it is equally important to go beyond producing sustainability reports, especially if they are reduced to being annual reports or marketing exercises.

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ESG & VALUE CREATION

Today, it is imperative that an ESG framework forms the foundational pillar for an organization as it caters to both the balance sheet and the wider environment. Studies have also shown that ESG can also influence consumer preferences and they are often willing to pay a premium for a green product.

A recent survey done by consulting firm Bain across 100,000 companies found that ESG performance has a strong correlation with brand equity of companies. Younger investors today are eager to ask questions beyond the financial performance of their investments with 40 per cent of Gen Z investors saying that their investments decisions are driven by “companies with a purpose”.

With leading investment firms like BlackRock and Vanguard looking through a sustainability lens while evaluating portfolios, there’s a broad consensus emerging among investors that investing in companies with a strong ESG-centric business model creates value.

EMBEDDING SUSTAINABILITY IN BUSINESS PROCESSES

ESG is not just about investor sentiment, it is a smart business strategy that needs to be embedded at the operational level. A better ESG score, according to Mckinsey, translates to about 10% reduction in the cost of capital for a company. This is because the risks that affect a business, in terms of its license to operate, are reduced if there is a strong ESG proposition. In addition to access to tax credits and subsidy eligibility, these practices bring in greater efficiencies and help mitigate any risk of adverse government action chance and regulatory penalty.

When it comes to the renewable energy sector, there is a higher-than-average level of asset optimization as green assets are more resource-efficient and enables a lower unit-cost structure. These benefits are over and above the core attributes of the renewable energy industry which has helped save millions of tons of carbon emissions in India. In 2022, ReNew helped avoid 11 million tons of carbon emissions, which is 0.5% of India’s total emissions.

ESG IN THE WORKPLACE

It is important to know that the ESG achievements of a company begin at its nascent stage when there is significant employee buy-in. There is a symbiosis between the organization and the employee from the very beginning. A workforce that is driven by a strong purpose has shown increased efficiency and productivity. Obviously, that is positive for a company’s bottom-line, given that it saves costs associated with recruiting, selecting, and training new employees who share the same set of goals. The gap analysis process, where a company identifies where it is currently and where it would like to be, is critical to its optimal functioning, and constant engagement from employees helps bridge that gap.

ESG AND RISK MITIGATION

When it comes to risk-mitigation under the ESG framework, many issues, including those related to climate change, cybersecurity, labour practices and ethical investing, are grouped together. In the absence of a strong ESG framework, each issue would require separate management attention that could have been used to tackle other important issues related to the company’s workings. This makes a very strong case for ESG being a part of the risk management framework, as it not only protects the company but also helps the long-term financial performance of the company by maintaining a competitive advantage. With risk management framework forming an integral part of a measurable and quantifiable benchmark, it becomes crucial for organizations to adopt one, given that organizations across sectors are looking to incorporate international standards. For instance, setting emission reduction targets in line with the Science Based Targets initiative can ensure that the new targets are aligned with the Paris Agreement. Building an engaged ESG culture helps manage and mitigate risk as well.

BEWARE OF GREENWASHING

While there are clear positive outcomes to be gained, there are challenges which we need to watch out for. For example, lowering carbon emissions is a common activity for any company.

However, the fact that it is treated as an expensive proposition with regulatory hurdles and ‘greenwashing’ is adopted by shifting emissions to the supply chain or setting low targets in companies demonstrates a lack of environmental commitment by many. The longer organizations continue to delay the transition from ESG-compliance to ESG-integration, the costlier it will be for them.

A well-implemented ESG framework not only helps build a responsible business but also enhances brand reputation, mitigates risk, enables long-term cost savings by increasing operational efficiency, attracts high-quality investors and eventually leads to a path of long-term value creation. Without it, companies in the coming years may not be able to sustain themselves and risk losing their edge for good. It is not an option but a necessity. We must all act now as responsible investing is the new normal.

[This piece is written exclusively for ETEnergyWorld by Vaishali Nigam Sinha, co-founder, and chairperson sustainability, ReNew]

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