Why ESG is Important for Businesses in the Modern Day

In the early 2000s, a time when leaders were just beginning to accept the social role of corporations, CSR was considered the next big thing. Lately, there’s a new and more powerful player in the market – ESG or environment, social and governance. New – because record inflows into ESG funds alerted the business world to its relevance in 2021. Powerful – because, unlike CSR, it directly affects the bottom line, having stronger consequences for the business.

While a 68% jump in ESG-oriented investing over nearly a decade is attractive, leadership should also focus on ESG for pure sustainability motives. Sanjiv Bajaj, Chairman & Managing Director of Bajaj Finserv and one of the top business leaders in India says, “ESG is not just the right thing to do; it is what will shape a better tomorrow for all! We have always focused on building long-term businesses built on excellence, sustainable profit.” Such empowering leadership is pertinent to steer businesses toward sustainable growth models. 

With experts signing off on sustainability as the fifth industrial revolution, unsustainable businesses are doomed. Investors looking at a company’s financial statements and ESG scores can see its long-term prospects. This also means that companies can be transparently held accountable. 

As such, ESG is now a responsible business strategy that can help businesses save costs, increase profits and gain high esteem in the eyes of an increasingly conscious public. Here is why seasoned leaders and new business entrepreneurs should focus on developing 360-degree ESG architecture.

Value Creation for Investors

Investors are increasingly prioritising sustainability and social responsibility. Reports state that 40% of investors in India want to put their money to hedge against ESG risks. Leaders should identify priority ESG concerns and interweave these into the business strategy to attract such investors. 

Businesses can showcase their commitment towards the environment by: 

• Swapping fossil fuels with renewable sources such as solar and wind energy
• Lowering carbon footprint in emissions and effluents
• Harnessing the power of bio-enzymes over chemicals 
• Leading the dialogue on climate change
  

Besides this, businesses must also demonstrate social responsibility and employee-centric work culture. Evidence-based storytelling of ESG-driven operations will distinguish companies in the eyes of investors, leading to higher long-term valuation. 

Cost Reduction

Historically, the best way to control costs is by aggressively cutting down utility bills. ESG is exactly aligned with that. Energy efficient swaps, proper waste management and a reduction in resource consumption reduce costs. It also appeals to investors who still want to see a good return on their investment. 

Rising operating expenses such as raw-material costs and the true cost of water or carbon can be substantially reduced by focusing on ESG. In fact, McKinsey research has found a significant link between resource efficiency and financial performance. It stated that effective execution of ESG can affect operating profits by as much as 60%. 

Leaders need to reduce dependency on limited resources, keeping in mind that it costs the environment and businesses too. 

Productivity Uplift

By incorporating ESG practices into company culture, leaders can: 

• Enhance employee motivation
• Instil a sense of purpose
• Attract and retain environment-conscious employees
• Aid in empowering future leaders

Recent studies have shown that positive social impact leads to higher job satisfaction. And satisfied employees are reportedly 13% more productive. Companies can work toward ESG by prioritising: 

• Worker safety and training
• Human rights protection
• Social impact activities
• Gender equality and women empowerment

They can also make every employee accountable for sustainability. Once sustainability is part of employee DNA, businesses can operationalise sustainability across their functions, increasing overall productivity.

Consumer Perception and Bottom-Line Growth 

Consumers are increasingly making eco-friendly choices, even while choosing businesses to patronise. This is prevalent among the younger population, which is much more invested in social justice and climate change. In fact, Generation Z consumers are willing to spend as much as 10% more on sustainable brands. 

It is clear that today’s world faces challenges that can’t be solved through the pursuit of profit alone. That is why leaders should not make the mistake of viewing ESG as a profit inhibitor or as a ‘nice’ gesture aimed at appeasing shareholders and customers. While it has immense monetary scope, it is also the responsibility of businesses to give back to society and the environment.

ESG allows investors and consumers to know what a business stands for, empowering them to make informed choices. As public awareness increases, the importance of ESG and other social awareness metrics will only magnify, and businesses knee-deep in these will benefit from a competitive edge.