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ESG: The Game Changer for Corporate Value Generation

More often than not, businesses, as well as government policymakers, consider sustainability to be a cost, but the opposite is often true. According to a report by the Business and Sustainable Development Commission, the implementation of the global Sustainable Development Goals of the United Nations by the year 2030 would generate business opportunities worth at least $12 trillion. All over the world, companies are now ambitiously planning to adopt the ESG goals as a part of their future business strategies.
ESG is a three-pillared concept comprising the following three components.

Environmental – E

This focuses on the energy consumption of a company and the waste it generates in the process of its business operations. Every business uses power and resources implying that its performance is affected by the environment and also leaves an environmental footprint.

Social – S

All businesses operate within local communities and the ‘Social criteria’ of ESG relates to the relationship between the company and the people it impacts. In particular, it includes issues such as labour relations or diversity and inclusion.

Governance – G

Governance is primarily the internal framework of processes, check mechanisms and regulations that a company deploys to make decisions. It also pertains to the compliance with the legal obligations and the fulfilment of stakeholder demands – which is now increasingly expected at the Board level.
Globally, sustainability investment is rising sharply and is already valued at over $30 trillion. Allocation of funds for ESG is an indicator of the organization’s commitment to social wellness. Focusing on ESG themes attracts greater social, governmental and consumer goodwill from the broader stakeholder environment in which an organization operates. Investors are more likely to back a company that they believe has a strong ESG framework, which would highlight a firm’s likely ability to achieve long-term growth and stability. ESG is no longer a cosmetic or feel-good exercise or a mere legal obligation. Shareholders, business leaders, customers and governments are increasingly demanding closer attention be paid to these increasingly business-critical issues.
At face value, ESG expenditure might make people question financial prudence. However, there is increasing evidence that suggests adopting ESG-centric measures can have a long-term and positive influence on a company’s profits. Some of these benefits are as follows.
1. Superior top-line growth: Stronger relations between businesses, government and the customers lead to a superior brand access to resources and higher demand from B2B as well as B2C customers.
2. Reduction of costs through focus on sustainable practices: ESG conscious businesses can reduce their consumption of water and energy to optimal levels, which not only contributes towards the environmental conservation of precious resources but can also save on operational costs.
 3. Greater compliance resulting in minimum regulatory and legal hurdles: By being diligent with compliances and following all regulatory processes, a company can manage to reduce legal complications, save on legal costs and penalties, and become eligible for governmental support or subsidies etc.
4. Superior employee productivity: Under the umbrella of social responsibility initiatives, organizations are focusing on creating a conducive and satisfactory work environment. This helps employees feel motivated, rewarded, and ultimately leads to enhanced productivity and performance.
5. Optimization of investment and capital expenditures: ESG conscious companies invest strategically in sustainable and high-quality assets which help them generate superior long-term ROI through environment-friendly operations.

ESG in the Indian context

ESG awareness is growing in India in the post-pandemic environment. There is a steady rise in focus on areas such as the rehabilitation of public spaces, the building of affordable housing for those marginalized in the society, social housing and environment-oriented investment in new buildings that harness smart automation and green building practices.
A key area where ESG practices can make great impact is the Non-Banking Financial Companies (NBFCs). In a country like India with rising lifestyle aspirations and rising per capita income, the NBFCs drive consumption by empowering people to purchase products such as consumer durables and smartphones. Their services are also designed to help customers meet cash needs through personal finance products. The long-term market standing of the NBFCs is going to increasingly rely on the quality of their ESG standards. There have been many examples of questionable conduct on the part of some finance companies in the past. In the future, major institutional financers including the banks may begin to review the conduct of retail NBFCs based on their work practices. This will drive the need for further ESG integration by the NBFC sector as a whole.
As a nation of over 1.35 billion people, India’s need for sustainability investment is significant.  The sooner ESG is adopted as an investment benchmark in the country, the better it is going to be for the long-term value generation for all stakeholders.
Views of the author are personal and do not necessarily represent the website’s views.
Vivek Kumar Sinha Chief Marketing Officer, Home Credit IndiaVivek Kumar Sinha is the Chief Marketing Officer for Home Credit India, in his present role he works closely with different business heads to devise innovative marketing strategies and accelerate Home Credit’s brand presence in India. He is responsible for effective planning and execution of marketing strategies including brand visibility, creative, product marketing, market intelligence and external communications.
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