Following the increased commitments by nations to achieve the objectives of the Paris Agreement and attain net-zero carbon emissions, there has been a corresponding increase in the consideration of environmental, social and governance (ESG) approaches by private investors in making investment decisions. Therefore, more funds are being allocated to projects and businesses that encourage and foster ESG sustainability, and businesses and technology leaders are now required to be more deliberate about their ESG policies as a functional approach to doing business.
In this publication, we highlight the concept of ESG, and how companies can better position themselves to attract investments from ESG-conscious investors.
What is ESG and ESG Investing?
ESG simply refers to a set of standards established within an industry to assess how companies operate in relation to the world around them, the people they interact with, and how responsibly they govern themselves. They are non-financial indices used to assess a business's practices and performance with respect to various sustainability issues. The main aim of these ESG policies is to ensure accountability by companies, and establishment of processes to effectively manage a company's impact in the eco-system in general, such as its carbon footprint, and treatment of employees, business partners and other relevant stakeholders within its industry.
ESG is built on three pillars:
- Environmental: this refers to a company's impact in the environment, and includes practices addressing issues such as use of resources, carbon footprints, waste management and renewable energy, climate action and risk mitigation, biodiversity, etc.
- Social: this relates to a company's influence in and risk to the society, and includes employee welfare, prioritizing corporate social responsibility, human rights, community engagements, etc.
- Governance: this takes into consideration the strength of the company's corporate governance structure, and its ability to act transparently and honestly, manage risks effectively and ensure the protection of the interests of all stakeholders.
ESG investing involves investments in companies which are determined to be committed to sustainable ESG practices. It has become the main form of sustainable financing. Investors have shifted their primary concerns from returns on investments, to how businesses steward these investments in relation to their environment and their commitment to the individuals they interact with.
Investment trends show that ESG-tailored investments have gained more traction over the years as investors are more biased towards companies that have optimal ESG performance. According to Thomson Reuters, at the beginning of 2021, sustainable investments/assets accounted for 35% of all managed assets worldwide and, at an annual growth rate of 15% over the last two years, ESG assets are expected to exceed $53 trillion by 2025. Businesses can dig into this growing pool by creating policies and procedures that align with ESG principles.
What are the Inherent Benefits of Adopting ESG Principles to Businesses?
Incorporation of ESG principles in businesses has become crucial to maintain a company's health and competitive edge. The following are some of the benefits of incorporating ESG principles in core business activities-
- It largely assures improved access to capital and the attraction of responsible and ethical investors.
- It also drives innovation and gives the business a competitive advantage. Companies who adopt sustainability measures can easily envision new market opportunities, develop new products and technologies, and meet ever-changing consumer demands.
- It positions the business for long-term sustainability and resilience.
- It plays a role in aligning the business with global sustainability goals and setting the business in the global scene.
- It contributes to the attraction of new customers for business growth.
- It has also been known to effectively reduce operating costs such as energy bills.
- Incorporating ESG principles into the core operations of the business also plays a role in boosting employee motivation and increased productivity.
How can Businesses Attract Investors through their ESG Initiatives?
Below are some of the key actions which businesses can take to attract investors through their ESG initiatives-
- Identify which ESG issues matter the most to your business and the business's stakeholders. This will involve the consideration of the business operations, financial performance, risk profile, etc. in a materiality assessment.
- Develop a clear and persuasive ESG outline that aligns with your business's mission and values. This outline should show how sustainability, social influence and good governance are embedded in your business operations and growth plans. This will help investors to appreciate your business's potential to create value in the long-term and mitigate risks.
- Adopt ESG data management tools. There are various ESG data management tools and software that assist in the collection, analysis, and reporting of ESG-related information suited to your business priorities and requirements.
- Incorporating transparent ESG reporting measures and disclosures. This is crucial in developing investors and consumers trust and the business's credibility. Businesses can adopt reporting standards such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), or the Task Force on Climate-Related Financial Disclosures (TCFD).
- Prioritize social impact. Implement fair labour practices, support local communities, ensure workplace safety, etc.
- Establish and implement strong corporate governance practices.
- Collaborate with ESG consultants and advisory firms to guide on ESG best practices and help identify on areas for improvement.
- Engage and network with ESG-focused investors.
- Continuous improvement in the ever-evolving ESG field is important to keep abreast with emerging trends and best practices.
ESG has gained significant prominence in the business environment determining how businesses operate and interact with stakeholders. It is important to note that there is no one-size-fits-all approach to ESG implementation. Businesses are advised to understand the peculiarities of their business and the climate wherein they operate and engage the services of ESG consultants/advisors to formulate a viable ESG policy that is suited for the business
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.