No business, industry, or service operates in a vacuum. They require a society and an environment conducive to their survival. It stands to reason then, that considerations for and sensitivity towards the environment and society should be as inherent to an organization as its bottom line. ESG investing prompts companies to pay attention to the way their product or service impacts the environment and mitigate the said impact. They strive to ratchet up policies and practices to benefit society and fair and transparent policies govern their growth objectives. Global sustainable investment now tops $30 trillion — up 68% since 2014. And its importance to a business — and to the world at large — is undeniable.
The ABC of ESG Investing
ESG stands for environment, social, and governance, and ESG investing is pouring capital or backing a business that hits a high score across all three letters of that abbreviation. If we consider a holistic perspective for business growth, therefore, ESG investing can be a significant plank in a business building for companies.
This form of investing dates back to 2005, when it first cropped up, and its importance has steadily risen. A recent report in McKinsey stated that there has been a five-time increase in internet searches for ESG investing since 2019. It is an investing yardstick that carries a lot of weight, with several companies incorporating policies that strive to tick the boxes of E, S, and G. The principals represented by this trifecta broadly include the following key elements.
Companies pay close attention to their carbon emissions, the environmental cost of their product/service, and ways to mitigate it and explore sustainable alternatives. Today, customers also pay close attention to a company’s standing on sustainable practices when it comes to buying products or services. Bearing this out is a Simon-Kucher & Partners. Study; it was found that 85% of consumers across the world reported shifting purchasing habits towards sustainable products over the past five years.
When it comes to trying to study the impact that a business has on society at large. However, this translates into ensuring you’re your product or service isn’t potentially problematic or harmful to members of society at large. In some cases, this even results in committed companies working to empower the communities they work in.
The policies adopted by businesses, the level of transparency in their operations, and the trust that the company fosters in its employees are reflective of good governance. Fair wages, open lines of communication, the ability to listen to employee grievances, creating opportunities, and ensuring diversity are also important when it comes to governance.
CSR or ESG — The Same, But Really Different
If you’re thinking this sounds remarkably similar to that other acronym, CSR, then you would be only partially right. Corporate social responsibility revolves around volunteer activities such as supporting a particular charity, committing to lowering the carbon footprint, employees volunteering in NGOs, etc. ESG investing, on the other hand, focuses on investors using the ESG barometer to check the benefit of backing a company that implements these principles. Moreover, ESG improves the valuation of a business; investors use it to measure the sustainability index of a company.
Why ESG Investing is Gaining Traction Over CSR?
1. Creating Value
For investors looking at the right companies to back, their ESG strategies play a significant role in the process.
2. Looking at Profit
According to the World Economic Forum, enterprises that put ESG practices into effect, reportedly record profitability of 20% above average. But while profit is certainly a key ingredient when it comes to creating value through ESG investing, it goes well beyond that.
3. An ESG Blueprint in the Investment Plan
When company leaders, managers, and entrepreneurs looking to start their business call on investors, they need to have a well-thought-out strategy when it comes to environmental and social sustainability and company governance. Doing so will engender the interest of potential investors and help firms monitor the ESG practices they outline.
4. Cost Reduction
Going sustainable and finding sustainable solutions for product/service development by default will lead you to think deeply about how to reduce waste, conserve water, reduce power use, etc. This, in turn, will help build efficiencies in the workflow, which will also play its part in reducing costs.
5. Focus on Innovation
The flip side of getting more efficient through improved processes also means constant innovation and development of products/services intending to mitigate the damage to the environment or even benefit the environment and society we inhabit. Better use of investment and optimization of resources is hard to imagine.
6. Gain Freedom from Legal Intervention
Businesses that have an ESG strategy as part of their ethos will probably find themselves free from any legal entanglements resulting from production activities that harm the environment or society. That, in itself, creates a strong positive impression of the company. Any company with robust ESG practices saves itself a lot of trouble from government intervention and regulation, across industries.
7. Loyal Customers
A general awareness of the state of the environment has also led customers to look more closely at companies that are environmentally conscious and offer sustainably sound products and services. As a business, doing so will help you develop a broader customer base that cycles back to greater profit and happy investors motivated to perhaps invest more (if needed).
8. Going Digital
One of the most important consequences of accounting for sustainability as an integral company strategy is migrating to a digital system and infrastructure as far as possible. It reduces wastage drastically, of course, but apart from that, it ensures less time spent on the daily rigmarole of ensuring updated paperwork or workflows and allows you to focus on product/service improvement, and gaining a competitive edge. It also ensures continuous innovation and a work culture that is adopting and preparing for a digital future.
Learning to Value Tech
There is no doubting the fact that ESG investing is gaining ground. On the one hand, is the extreme importance of digitization today and technological developments that are progressing at a blink-and-you’ve-already-missed-it pace. On the other is a climate crisis that’s growing every day. ESG investing, then, serves as a motivating tool for most companies to do more in both spheres. And that digital and technology companies are key players not just as businesses unto themselves but to the value they provide to other industries (healthcare tech anyone) is noteworthy.
Therefore, to be able to understand the ins and outs of investing, and getting savvy with the valuation of tech companies is just what the ESG Investing: Building and Managing a Sustainable Global Portfolio from Columbia Business School will help you with. The seven-week course explores various facets of ESG investing such as reporting frameworks, rating, supplementary data etc.
For investors, finding the right company to back is not an easy job. But one that takes its ESG seriously should definitely count as a business to look at more closely. In a sense, you can go so far as to say that the world depends on making smart, sustainable, and worthy choices.
By Gauri Kelkar
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