Strong profit margins and revenue generation is slowly transitioning out. Organizations are now looking at the bigger picture to examine if their business activities are sustainable along with being successful. Globally over USD $30 trillion (KPMG) has been invested into ESG and Sustainability related ventures. This figure represents the 34% (KPMG) increase seen over the past two years.
In order to make the transition to better investments a lucrative, not just thoughtful venture, businesses must exercise due diligence. This takes the form of adequate research and investigation into the best possible methods to employ for the environment, society, the government and also for internal values and goals. In order to best execute the same, organizations often looking to introducing ESG consulting or ESG advisory services for the most efficient and effective results.
What is ESG
ESG and Sustainability-based investments are the latest in ethical ventures and considerate propositions. The term ESG describes the environmental, social and governance aspects that help categorize more sustainable and responsible investment. The term is used within capital markets and by investors to deduce the best corporate behaviour encouraging future success, both financially and in assessment against competitors. ESG and sustainability investments are a subset of non-financial performance indicators that help deduce whether an organization is actually running as they should or is likely to see future failure.
The three main factors considered for ESG investing are;
There is a large degree of awareness surrounding better practices towards the environment. Introducing factors like renewable energy, anti-pollution stances, and GHG emissions help businesses make a positive impact on their surroundings while creating a presence for themselves within their industry. Organizations aware of their environmental liabilities are in a better position to not only rectify the same but introduce better measures that could prevent future liability from occurring.
The social criteria explores the organization’s relationship with stakeholders. This includes surrounding communities, employees, shareholders and other individuals affected by the performance and activities of the business. Understanding absenteeism rate and workplace safety measures help create a healthy work environment encouraging social positive outcomes. These take the form of moral boosts, productivity increases and improved overall brand loyalty.
Governance risks consist of compliance and risk management. Ensuring that a business maintains the best possible policies with meeting rules and regulations outlined by the government helps with sustainable growth and reduces the risk of liability at a later date. Neglecting the government’s role in business development could lead to unpleasant outcomes, including the closure of the company or fines that never seem to end due to non-compliance. Over 55% (KPMG) of CEOs believe in order for their organizations to grow, they must look at growth beyond figures and financials. Long term sustainable growth must include an ESG aspect for the best possible results.
What is Sustainable Investing (ESG)
There are a number of factors that help determine whether an investment is truly sustainable. Seven commonly used factors are;
- Negative/Exclusionary Screening – Putting together lists of companies or industries that conduct objectionable activities that are not to be considered as sustainable.
- Norm Based Screening – Eliminating organizations based on their violation of well-enforced norms such as the UN Global Compact principles.
- Positive/Best-In-Class Screening – Companies with a strong ESG performance.
- Sustainability themed investment – Circles around causes heavily leaning toward sustainability practices e.g. renewable energy or clean water.
- ESG Integration – The ability to include ESG factors into fundamental analysis methods.
- Active Ownership – Understanding portfolio companies deeply.
- Impact Investing – Understanding which organizations make not only positive impacts on ESG issues but also on earning market returns.
These factors help segregate companies that fit a sustainable investment bill and are likely to have long term positive impacts on surrounding factors and communities.
Why Bring Focus on ESG
There are a number of benefits offered to an organization focusing on sustainability and ESG investing. The five main benefits are;
Introducing strong ESG propositions can help organizations venture into new markets and expand the ones they currently operate in. When government compliant in particular, authoritative bodies are likely to offer better access, stronger approvals and faster licencing as needed. As a result, opportunities for growth can be approached with aggression and efficiency. Organizations that are looked at as ESG compliant are also perceived as beneficial by the public, further pushing opinions and privileges their way. This also limits the need for hardcore long term planning to achieve the same. ESG compliant businesses simply grow faster and stronger.
ESG compliant organizations are able to combat rising expenses such as the use of non-renewable energy and raw material costs. Introducing more efficient methods across the organization, including better energy/water/material management systems and substituting non-renewable options for more environmentally friendly ones, not only assists the environment and surrounding communities but lowers long term operational costs for the business.
Additionally, neglecting environmental factors could lead to heavy fines moving forward.
Minimizing Regulatory and Legal Interventions
Stronger external value propositions encourage companies to achieve stronger strategic freedom, in turn reducing regulatory pressure. Companies with a strong ESG presence are significantly less likely to face multiple visits from governing authorities and bodies as the structure of the business is centered around better practices.
ESG compliant businesses have already taken into account the importance of the governing bodies and their role in ensuring organizational success. Introducing compliance measures before asked is guaranteed to have a strongly positive impact.
The social aspect of ESG covers the way the organization interacts with communities and stakeholders. This is particularly important to retain and grow employees within the organization. If the work environment is not safe and conducive to better activities, employees will be quick to offer redundant form or simply quit. Introducing strong safety measures, comfortable work environments and a stronger sense of belonging help raise productivity. This benefits both the organization and overall morale.
ESG investments allow for an educated allocation of capital. This means investment opportunities are likely to have better returns in shorter periods of time than conventional investment ideas. This is heavily contingent on taking proper account of all factors surrounding the investment.
Focusing on ESG and sustainable investments helps organizations prioritize success on a broad scale over momentary profit rises or increases in revenue. Creating long-term growth and development is contingent on making the right business decisions and capitalizing on the best investment opportunities. Putting time, effort and resources into ESG opportunities creates a positive impression internally and externally, making activities simpler moving forward.
ESG compliant organizations are likely to see both short and long-term benefits. Additionally, they are also likely to see better responses than their competitors from authoritative bodies and the government when looking to scale activities as needed.