Are ESG goals at odds with financial goals for businesses?

Traditionally, companies have prioritised financial goals over Environmental, Social and Governance (ESG) goals. This is because many companies and investors have historically viewed ESG considerations as separate from financial performance and even as a negative influence on financial returns. As a result, companies have focused on maximising financial gains rather than considering the potential long-term risks and opportunities associated with ESG factors. However, this view is changing as more and more companies and investors are recognising the potential long-term impacts associated with ESG.

The growing importance of ESG for consumers

Customers today are keen on using products and services that are environment-friendly and contribute toward sustainability goals. In India as well, sustainability concerns have taken the limelight as nearly half of the surveyed population include sustainability in their top five key purchasing criteria. Due to this and similar trends in the rest of the APAC region, businesses are now looking to incorporate sustainable practices into their business processes.

Policies and regulations imposed regarding ESG

The environmental and social concerns have led investors all around the world to implement an ESG-led investment strategy. Owing to this, SEBI, the Security and Exchange Board of India, has announced that the top 1000 listed companies in India should report on Business Responsibility and Sustainability. Moreover, in 2020, RBI directed banks and NBFCs to develop policies and procedures for integrating environmental and social risks into their lending operations, making ESG corporate policies more stringent. Moreover, Prime Minister Narendra Modi has also pledged that India will achieve its net zero target by 2070.

Higher revenue and reduced cost through ESG

ESG can become an integral part of organisations to boost their return on investment and increase their overall profitability. This is becoming increasingly apparent as a majority of business leaders have reported that ESG delivers significant ROI. Moreover, a 2021 meta-study of nearly 1000 research papers discovered that ESG initiatives benefit companies financially. According to 58% of the studies, there is a positive correlation between ESG and return on equity, assets or stock price. To achieve high revenue, organisations should focus on improving brand reputation and customer loyalty through ESG. Companies that have strong ESG practices may also be able to access new markets and customers that are more conscious of environmental and social issues.

Attracting investments through sustainable business practices

Undoubtedly, companies would want more investors for the growth and success of their business. But as investors become more cognizant of ESG and sustainable investing, they are willing to collaborate with companies sharing the same ideals. They are proactively incorporating ESG audits into their due diligence processes, and companies showing an inclination for ESG-led strategies have better chances of expanding their businesses through these investors. Investors favour these companies, knowing they are more likely to outperform benchmark indices than companies that do not integrate ESG corporate policy.

Maintaining the Social License to Operate (SLO)

Incorporating ESG can also help improve and maintain a company’s Social License to Operate (SLO). SLO can help to improve a company's reputation and brand image, while helping them to expand and grow without internal as well as external resistance. Companies that are viewed as responsible and ethical are more likely to be trusted by consumers, investors, and employees, which can lead to greater productivity, increased sales and a higher stock price. Furthermore, companies with a strong social licence to operate may also be able to access new markets and customers more conscious of environmental and social issues. This can lead to increased revenue and growth for the company.

In conclusion, it is a misconception that ESG goals are at odds with an organisation's financial goals. In fact, it is quite the driver of ROI and brand reputation for businesses, and can be instrumental in them reaching their financial goals.