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"Why ESG ?" - The a-b-c of ESG series
"Why ESG ?" - The a-b-c of ESG series

August 12, 2022

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I hope you enjoyed reading my first blog/article (What is ESG?) in this a-b-c of ESG series. Now, let's try to understand why ESG (Environmental, Social and Governance factors) has become so relevant.

In my opinion there are some primary forces that have directly contributed to ESG becoming a critical topic of discussion. Additionally, there are some key derived (or secondary) forces that have accelerated the adoption of good ESG practices by organizations.

ESG - Forces at Play

 

 

 

 

 

 

 

 

 

 

 

 

Let's dig deeper into each one of these.

Primary Forces:

1. Heightened Awareness of the Climate Crisis: This is seen by the increasing commitment for action by governments and organizations. The UN Global Compact has 15,000+ companies from 160+ countries (including 400+ companies from India) as signatories. The Paris Agreement on climate change has been signed by nearly every country in the world and each nation (including India) has been making steady progress towards their nationally determined contributions (NDCs) in mitigating climate change.

2. Growing Scarcity of Key Natural Resources: Our planet Earth is a complex system of nature's forces that relies on a fine ecological balance to thrive. As our global population continues to grow, and as more and more people get lifted out of poverty, there will be an increasing strain on our planet's limited natural resources. Access to some key natural resources, like fresh water is already becoming difficult in some parts of the world. Similarly, in decades to come, experts are projecting scarcity of basic food items.

3. Growing Economic Inequality: In his thought-provoking book, Capital in the Twenty-First Century, published in 2013, and as relevant then as now, the French economist Thomas Piketty used a data-driven approach to study the accumulation and distribution of wealth and income ("capital" in the book) across decades, and in some cases across centuries. His research team studied data from around twenty countries and in more detail from France, the UK, the US, Germany, Japan, Sweden, Italy, Canada and Australia, to empirically show the long-term trend of economic inequality in developed countries . More recent studies have revealed that after navigating the worst of the COVID-19 pandemic, these inequalities have potentially become more accentuated.

 

Secondary Forces:

4. Increased Stakeholder Advocacy: From the traditional view of shareholder primacy as the sole purpose of a company's existence, we are shifting to an era of increased stakeholder advocacy brought about by i) clients asking vendors to partner on impactful ESG practices, ii) employees, especially the Millennials and Gen Z, actively seeking companies to be more ESG-active iii) investors advocating companies and their boards for more transparent ESG disclosures (and mitigation plans) in an increasingly volatile and uncertain business environment iv) local communities asking the companies which operate in their geographies to be more engaged and act more responsibly.

5. Increasing ESG Regulations: We are see a steady increase in legislation/ regulation of ESG disclosures. For example, the Securities and Exchange Board of India (SEBI) has, for FY 2022-23, mandated that the top 1000 listed companies disclose ESG-specific metrics via the Business Responsibility and Sustainability Reporting (BRSR). The EU has recently passed legislation for the Corporate Sustainability Reporting Directive (CSRD) requiring all large companies (meeting at least 2 of the 3 criteria (250 employees and/or EUR 40M annual turnover and/or EUR 20M total assets) to publish regular reports on their environmental and social impact activities). Earlier this year, the US Securities and Exchange Commission (SEC) has proposed sweeping changes to reporting disclosures that if adopted will result in publicly listed companies disclosing extensive climate-related information in their SEC filings.

6: Positive Evidence of Corporate ESG Impact: A comprehensive study by New York University (NYU) researchers after examining more than 1000 research papers published from 2015-2020 found a positive relationship in 58% cases between ESG and a company's stock performance/ Return on Equity. This is also intuitive as in an increasing VUCA (volatile, uncertain, complex, ambiguous) business environment, what will separate great companies from good companies is increased transparency and action towards topics material to a company and its wider set of stakeholders. And ESG is increasingly emerging as a critical lens to view this materiality.

 

 

 

 

 


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Anuj D
Head - Sustainability & ESG

I'm passionate about dovetailing business strategy with agile execution to drive impactful strategic initiatives at progressive organizations which focus on sustainable business outcomes. Current focus is driving ESG (focus Sustainability) awareness and best practices at scales across organizations.

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