Sustainable development is an approach to economic and social progress that works for everyone. It focuses on the idea that any form of growth can last longer if it nurtures all sections or elements in society, including our environment.

Companies are understanding the importance and benefits of adopting an ESG framework. Non-financial disclosures are being made through ESG reporting to maintain transparency with investors, customers and employees. In this blog, we shall see how businesses can leverage upon significant fundraising through ESG disclosure.

Why Are Investors Shifting Towards ESG Investments?

The wave of ESG practices is altering traditional investment methods globally. There has been an evolution in the funding trend. Investors are updating their portfolios to include businesses that are environmentally and socially conscious. They are starting to prefer companies that are sustainable.

Integration of ESG into the business portfolio not only mitigates the risk but also contributes to better returns. Thus, there has been a significant change in investment patterns by individuals globally.

What Popularized ESG Stocks?

There are several factors acting as a catalyst for the growth of ESG stocks. Companies with strong ESG grounds attract B2B and B2C customers with sustainable practices.

By being ESG compliant, companies receive support and subsidies from the government through deregulation. Enormous funding is diverted towards ESG compliant companies as their investments are long-term, sustainable, and environmentally sound which also cuts down the proportion of risk.

The bid for a ‘sustainable tomorrow’ is also compelling companies to incur some extra expenditure to go green. According to research conducted by McKinsey, 70% of the consumers from across various industries were keen to go green, even if it meant paying an extra 5% for a cleaner product as an effort to combat long term climate change threats.

Do ESG Investments Produce Enhanced Returns?

According to the world’s largest asset management firm, BlackRock, when Covid19 had affected the economy in 2020, ESG investments performed outstandingly well. BlackRock is one of the pioneers promoting sustainable investments. The company strongly believes that ‘climate risk is investment risk’.

As per Nordea Equity Research (largest financial services group in the Nordic region) from 2012-2015, companies that performed extremely well in their ESG ratings outperformed their peer companies by at least 40%.

Neste is a more than 70-year-old company in Finland. It was primarily a traditional oil refining and marketing company but now it has started generating fuel from renewable resources and gains more than two-thirds of its profits from sustainable business practices. The future of equity investments lies in striking a balance between profit-making and embracing ESG practices.

How Are The Pillars Of ESG Impacting Business Strategies?

The growing threat of climate change is no longer restricted to conference rooms. Theories are translating into action in the form of ESG practices. There is an expanding demand from the shareholders who seek to invest where the values and ethics of an organization are positioned parallel with the global climate change action plan.

Investors are drifting away from business investments in companies that are environmentally and socially dysfunctional. There lies a cutthroat competition in the market and businesses have no option but to adopt an ESG strategy. Investment decisions are now being based on how a company’s ESG indicators perform over and above the financial performance.

ESG adoption was promoted considerably when the United Nations (UN) launched the Principles of Responsible Investing in 2006. It encouraged investors to be the flag bearers of sustainable investments and enhance ESG practices by taking social and environmental limitations into account.

Eventually, in 2006, 63 investment companies including asset owners, asset managers, and service providers became signatories who signed a commitment and promised to integrate ESG into their investment practices. From 63 investors in 2006 with investments worth 6.5 trillion dollars in AUM, the number of participants increased to over 1700 with 81.7 trillion dollars in AUM by 2018.

Conclusion

The relevance of ESG metrics and scores is getting brighter with each passing day. Companies are redesigning their business frameworks to leverage ESG compliance.

The significance of ESG in the corporate sector is expected to grow stronger in coming times as it conjugates profit building strategies with environmental and social welfare.

In 1987, The Brundtland Commission published a report titled ‘Our common future’ which gave birth to the guiding principles for ESG reporting as we know it. It defined sustainability as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.”

The concept of sustainable development not only focuses on environmental conservation but also on social equity and economic development for all. The approach is built upon the idea that any form of development can last long if it nurtures all sections and elements of society and the environment.

Current Scenario

Climate change is no longer an environmental concern but a potent threat to economic growth. According to a recent IPCC (Intergovernmental Panel on Climate Change) report, the need for effective and equitable climate governance built on engagement between civil society actors, political actors, businesses, youth, labor, media, Indigenous Peoples, and local communities. Businesses have a decisive role to play in the equation and many benefits to gain by adopting an ESG reporting strategy.

The COP26 (Conference of Parties) held in Glasgow in 2021 reflected this. According to McKinsey, at the conference, more than 5,200 businesses pledged to achieve net-zero carbon targets by 2050, and around 450 investors, banks, and insurers (representing $130 trillion in assets and 40 percent of the world’s private capital) made commitments to create climate-neutral portfolios by 2050.

The 5 Benefits of ESG Reporting

Adopting and implementing an ESG reporting strategy would entail a significant allocation of funds and resources for companies. So, the big question is – What do businesses have to gain?

A strong ESG proposition can lead to five tangible benefits for businesses.

1. Fundraising

Investors are now updating their portfolios to include environmentally and socially conscious businesses and navigating sustainable practices. Integrating companies with ESG reports into their business portfolios not only mitigates the risk but also contributes to better returns. According to BlackRock, when COVID 19 blew the market in 2020, ESG investments performed outstandingly well.

2. Positioning

A solid external proposition can lead to the easing of regulatory pressure. It may garner increased government support. In addition, ESG reporting is a fantastic way to highlight and showcase a company’s achievements and initiatives.

3. Top Line Growth

A solid ESG strategy can help businesses enter new markets and expand further into existing ones. Countries are now increasing mandates on backward integration of ESG agendas mandating companies to include their complete supply chain into their ESG reports. The new SEC (Securities Exchange Commission) rule mandates companies to report the Scope 3 emissions across their entire supply chain. Companies that may not be mandated to publish an ESG report may now have to do so.

4. Cost Savings

ESG adoption can lead to direct cost reductions for example from reduced energy consumption, among other advantages. As per a McKinsey report, executing an ESG strategy effectively can reduce operating costs by up to 60%.

5. Employee Retention and Motivation

A well-formed ESG strategy can lead to attracting and retaining employees. It can also lead to enhanced workforce productivity through instilling a sense of purpose. Additionally, people are now choosing to work for climate-conscious companies. Increased productivity and attracting better talent not only lead to higher profits through performance but also reduce the cost of retention.