What is ESG and why is it important for Businesses and Investors?

Why ESG is important to Businesses and Investors? In the past few years, people around the world have become more aware of issues like climate change, social justice, and good corporate governance. As a result, investors are using more than just conventional financial criteria to assess the performance of the companies they invest in. The ESG (Environmental, Social, and Governance) framework has gained popularity as a tool for assessing businesses and helping investors decide where to put their money. Understanding what ESG is and why it has become such a crucial factor for investors is crucial in this situation.

Investors are now aware that a company’s long-term success is correlated with how well it performs in ESG areas. Long-term growth and financial success are more likely for businesses that prioritize sustainability, social responsibility, and sound corporate governance. As a result, beyond only looking at a company’s financial measures, investors are now applying ESG criteria to evaluate its sustainability and prospects for long-term success. Due to this, investors should now give ESG greater consideration as they try to make wise investing decisions. What is ESG?

ESG is an acronym that stands for Environmental, Social, and Governance. It is a framework that assesses a company’s performance in three areas:
  1. Environmental: This includes a company’s impact on the environment, such as its carbon footprint, energy usage, and waste management practices.

  2. Social: This includes a company’s impact on society, such as its treatment of employees, human rights practices, and community engagement.

  3. Governance: This includes a company’s management and oversight practices, such as board composition, executive compensation, and shareholder rights.

Companies and investments are evaluated using the ESG framework based on how well they perform in these three areas. Beyond just looking at a company’s financial metrics, investors can evaluate its sustainability and potential long-term performance by using ESG criteria.

Why is ESG important for Investors?

1. Risk Management: Businesses with poor ESG performance are exposed to dangers that could jeopardize their long-term viability. Companies with poor governance practices, for instance, may be more prone to fraud or corruption, and companies that fail to manage their environmental impact may be subject to fines or legal action. Investors can better manage these risks and make more knowledgeable investment decisions by incorporating ESG criteria into their decision-making process.

2. Long-Term Performance: Long-term financial success is more likely for businesses that perform well on ESG metrics. Strong governance practices, for instance, will make businesses more transparent and answerable to shareholders, which can boost their financial performance. Similar to this, organizations that place a high priority on environmental and social issues will be better equipped to adjust to shifting consumer and regulatory preferences, avoid negative press, and harm their reputations.

3. Alignment with Values: ESG is not just about financial performance for many investors; it also involves matching their investments with their values. Investors who care about social justice, for instance, might want to steer clear of businesses with a history of violating human rights, while those who care about climate change want to steer clear of businesses with large carbon footprints. Investors can more effectively match their investments with their values by incorporating ESG criteria into their investment decisions.

Why is ESG important for Businesses?

Environmental, Social and Governance (ESG) is about driving business growth while building a more sustainable, equitable, and ethical future for the world. ESG is upending the way businesses operate and think about their future.

  • ESG Offers Competitive Advantage: ESG metrics are important to consumers, employees, lenders and regulators. Company leaders who make efforts to improve labor conditions, promote diversity, give back to the community and take a stand on socioeconomic issues play a major role in strengthening a company’s brand.

  • Attract Investors and Lenders: The inclusion of ESG reporting in earnings reports is trending among businesses. Investors and lenders are becoming highly attracted to organizations that invest in ESG and use ESG disclosures to shed light on their sustainability efforts.

  • Improve Financial Performance: ESG not only makes a business favorable to lenders, but it can also improve the overall financial performance of a business. Efforts such as asset management, cloud migration and optimization, resilient infrastructure, supply chain efficiency and even small efforts toward sustainability — such as going paperless, recycling, or making energy-efficient upgrades — will improve a business’s bottom line and ROI.

  • Builds Customer Loyalty: ESG means harnessing the empowered customer. With resilient infrastructure, supply chain optimization, managed risks, customer incident management and sustainable product development, customers are empowered with getting products, services and information they need. Customer loyalty will drive increase in business’s revenues.

  • Builds Employee Loyalty: ESG emphasizes dignity in employment with renewed focus on benefits, health and wellness, career development, training and enablement, DE&I, connected workplaces, interaction tools for cohesiveness and belonging, optimize team dynamics with extended reality tools etc. Employee loyalty drives higher productivity, improved retention, new talent attraction and higher revenues and outputs.

  • Makes Company Operations Sustainable: Industry research shows that, by leveraging sustainable practices, organizations have enhanced brand reputation and better ESG ratings. More importantly organizations improved operational efficiencies by 50%, improved governance and risk management strategies, reduced supply chain costs, improved customer retention and increased sales.

  • Comply with Government Regulations: Though current set of regulations are not clearly defined, it is clear that ESG issues are moving from a mainly voluntary disclosure-oriented dimension to a regulatory one with significant implications for how ESG information is collected, verified, and acted upon within an organization. Across the world, various governments are pushing companies to enhance and standardize ESG related disclosures. Currently majority of the regulations are limited to publicly traded companies, but these regulations will soon expand to private organizations. Take control of ESG now.

  • Tax Credits and Incentives: S. tax law includes numerous tax incentives, including deductions and credits that are meant to steer businesses toward engaging in more environmentally or socially beneficial behaviour, including several provisions that were included in the newly enacted Inflation Reduction Act of 2022 (IRA).

  • IRA Provisions that support “E” of ESG include the following incentives – Energy-efficient commercial building property deduction, Soil and water conservation and endangered species recovery expenditures, renewable electricity production credit, plug-in electric vehicle credit, alternative fuel vehicle refuelling property credit, enhanced oil recovery credit, energy conservation subsidies

  • IRA Provisions that support “S” of ESG include the following incentives – Opportunity zone credit, work opportunity credit, employee retention credit (during the COVID-19 pandemic), charitable contribution deduction, payroll taxes including Medicare and Social Security

As a society, we have a responsibility to ensure that our investments have a positive impact on the world. In conclusion, investors are increasingly considering more than just financial metrics when evaluating companies. This change is happening because people all over the world are becoming more aware of issues like climate change, social justice, and corporate governance. Investors now understand that a company’s performance in these areas is closely linked to its long-term success. As responsible investors, they want to make a positive impact on the world and contribute to a more sustainable and equitable future. By prioritizing companies that are socially responsible, environmentally sustainable, and well-governed, they can create positive change and help shape a better world for themselves and future generations. Making investment decisions that align with their personal values not only makes financial sense, but is also emotionally fulfilling, knowing that they are contributing to a better world.