Why ESG needs to be at the forefront of corporate strategy

The authors set out the emerging importance of the Environment, Society and Governance (ESG) framework in the global scenario and deep dive to relate the same to nuances in an Indian context. They argue that the yardstick for business success is already changing; a clear agenda is emerging that is shifting focus from ‘short term’ profitability and shareholders to ‘long term’ sustainability and stakeholders.

A loud and clear message is given; organisations can no more focus merely on their own self-interest; their radar now needs to be wide enough to encompass the well-being of the environment in which they operate and the society they interact with. A governance mechanism that factors in the well-being of all the stakeholders will make corporates sustainable in the longer term.

Corporate strategies that incorporate ESG propositions are likely to be sustainable and successful. The authors anecdotally bring together illustrations from the Tata group, Marico Industries, Olam International, Ranbaxy and many others, to strengthen their message on the growing importance of ESG.

Social dimension
The authors clearly explicate the ESG components; environmental sustainability is demonstrated through optimal natural resource and energy consumption, responsible waste and pollution management leaving a minimal environmental footprint. The social dimension is determined by the links and ties the company creates with the local community, the concern for its employees and the working conditions, diversity and inclusion and factoring in the ‘long term’ well-being of other stakeholders, including suppliers, customers and the community. The governance dimension brings together the role played by independent directors and board-effectiveness in ensuring transparency, stakeholder well-being through systems, processes and audit controls.

The last three decades have fundamentally transformed India’s economic paradigm. The economic liberalisation of the early 1990s and the calibrated opening up of industries to competition redefined the rules of the game where Indian consumers gained significantly, enjoying products and services that were unseen before. Corporate India found it challenging to realign itself with the changing environment; from a protected environment to open competition. In the transition, corrupt practices and large-scale scams surfaced, bankruptcy cases ballooned, weak governance structures were exposed and many large successful traditional companies vanished, while a new breed of players emerged across industries.

Manmade environmental crisis, including flooding and drought, industrial, vehicle and air pollution, usage of bio non-degradable waste, global warming and climate change brought to fore the debate on the need for a good quality life for the citizens. These have driven the emergence of far-reaching regulations that have redefined, and shifted a part of the responsibility to the private sector.

Interconnected world
The pandemic has further given us a rude shock as to how inter-connected the world has become. It has shown us the magnitude of supply chain disruptions, migrant labour issues, unemployment and demand slump, resulting in severe economic stress that can be triggered off by such ‘black swan’ events.

Today, as we stand and look back, many of the myths that had been taken for granted, are now being seriously challenged. The concern for the planet and society was never on the corporate agenda in a big way; that will now seriously change. Greenhouse gas emissions, deforestation, targeting ‘net carbon zero’ trajectories will now be a centre-piece of their ‘long term’ strategies. While such initiatives for sure are bound to negatively impact profitability and shareholder value in the ‘short term’, it will enhance long-term stakeholder value creation and sustainability. Such pressures will be more on developing countries like India in comparison to developed countries, but companies need to view them as opportunities rather than threats!

While on one hand the world is becoming uncertain, risky and volatile, on the other it is today far more connected than it used to be; trends that impact the corporate world are swiftly transferring across the world, exerting enormous pressures on businesses.

In effect the shift from shareholder wealth creation to stakeholder ‘value creation’ is already happening. The media plays a crucial role in partnering with corporates to enhance ESG effectiveness; constructive criticism by the media that is well taken by responsible companies is a path that will lead to a sustainable future for the corporate.

Constructive pressure
Transparency, connectivity, the role of stakeholders and institutional investors is bound to increase, thereby, exerting constructive pressure on corporates and business eco-systems in fighting against corruption, demanding higher standards of ethics, compliance, conduct and concern towards stakeholder well-being. Corporates and boards need to be prepared for such an emerging externality.

The United Nations’ sustainable development goals (SDG) and targets to be achieved by 2030 are ambitions and include eliminating poverty, health and well-being, clean energy, responsible production and consumption, climate action and gender equality. There is enormous international pressure on countries and corporates to seriously contribute to a global sustainability agenda.

The authors highlight that dignity and respect for employees is becoming an important agenda that will deepen employee trust and engagement. A human capital strategy that provides for gender equality, psychological safety and inclusivity, along with ‘fair pay’ will enhance the employee’s purpose at work.

The authors quote George Kell, the founding director of United Nations Global Compact: “ Technological change, environmental imperatives and long-term social norm changes will propel ESG investing and corporate sustainability forward. Intelligent ESG investing is bound to become the new normal.”

Walking the talk
A meaningful ESG agenda stems from a focused ‘core purpose’ of the company. It is further strengthened by the commitment from the ‘top’ and walking the talk through investment in people, establishing systems, code of conduct and metrics to measure progress. A code of conduct, encompassed around the purpose and strategy of the organisation, should ideally set out in clear terms its expectations in terms of values, rules of conduct and responsibilities towards all stakeholders, including the planet. Such a code can also extend to all associates in the supply chains. A ‘whistle blower’ policy to flag-off deviations will enhance the execution.

The authors underpin the growing importance of institutional investors whose market value is now close to a third of the overall market capitalisation of Indian companies; hence, they have ‘stewardship responsibilities’ for monitoring, engaging and enhancing the ESG performance of their investee companies.

Such powerful global investors have subscribed to the UN principles of responsible investment; which means corporates that are concerned and act in the best interests of the environment and society and have seamless governance are likely to attract higher quality investments.

These drive companies to incorporate ESG measures that are linked to sustainable ‘long term’ growth in order to thrive.

(Dr Suresh Srinivasan is Distinguished Professor, Strategy & Accounting, Great Lakes Institute of Management, Chennai)

Outlast: How ESG can benefit your business

Mukund Rajan, Col. Rajeev Kumar

Published: Harper Business

Pages: 488 Rs 637