Why ESG is Gaining Momentum?

It has become increasingly clear over the last couple of years that we have been going through major challenges; Factors like COVID-19, social & geo-political conflicts and most recently the high inflation have changed the way we establish a successful sustainable business. Now ESG, interchangeably used with socially responsible investing, impact investing, and sustainable investing facilitates sustainability goals as it is measure and standardized.

ESG is not a new norm and has been evolving over many couple of decades. However its first popular use was in the report titled “Who Cares Wins” in 2004, an initiative of the UN with the Swiss Government. There are many factors that has been fueling the inception of ESG in business.

Change in investor’s dynamics

Global investors have been signing up for PRI (Principles of Responsible Investment) which promotes and incorporates ESG into investment analysis and decision making process. Growth in PRI will significantly drive ESG asset growth. New generation of global investors demand that business pour back into their local communities rather than just being profit-driven. Back in 2018, Bank of America Merrill Lynch stated that ESG could affect a company’s’ financial performance thus an investor returns. We can also see this being evident from the recent survey by Morning Star that “Sustainable funds and investors (in other words ESG funds and investors) had enormous success in 2021. Investors poured nearly $70 billion into sustainable funds, and returns generally outpaced those of conventional funds.

Companies with strong ESG performance have demonstrated higher returns on their investments, greater business transparency, lower risks and better resiliency during a crisis.

Climate Change

The changes to our climatic conditions pose a great threat to our health and also our survival. Four key climate change indicators (Greenhouse gas concentration, Sea level rise, and Ocean-heat & acidification) have set new records in 2021 - (WMO). This extreme weather has caused loss of countless lives and also and is reported to have cost the global economy around 343 billion U.S dollars in 2021 (World Bank). Climate change presents financial risk to the worldwide economy. Governments and companies worldwide are pledging to achieve net-zero emissions of greenhouse gases as they find that would a considerable way to curb the rising temperature around the globe. ESG allows business to measure it climate change related data. Task Force on Climate-related Financial Disclosures (TCFD) is a widely used standard for reporting these changes. This data can lead to companies re-evaluating their operational strategy and be better prepared to tackle any issues that arise out of climate change. Disclosure / Reporting of this data can also lead to better business and reputation. For example “Environmental law firm Client Earth, a Shell shareholder, said Tuesday that it had notified Shell of its claim against the company’s 13 executive and non-executive directors” – CNBC reports.

Retaining Corporate Talent & Loyal Customers

A report by “Gallup” states that an organizations environmental records plays a major role in whether a candidate is willing to accept the job. Millennials and Gen Z and are also less likely to put up with social injustice at work and prefer positive engagement. 86% of employees prefer to support or work for companies that care about the same issues they do. Companies with good ESG (Social metrics) can help with better employee productivity, satisfaction, retention and also attract new talent. A good business not only has exceptional candidates but also loyal customers on the other end of the spectrum. It’s also safe to say that your employee also is your best customer. Surveys have shown that atleast 83% of consumers think companies should be actively shaping ESG best practices (PwC). Customers are willing to pay more for products that are safter, healthier and more environmentally concisions. Hence a company with a good ESG rating is sure to retain its loyal customer base.