Till the last decade we have learnt in our management courses that the main objective of any business is to maximize shareholder’s wealth, which will attract investors and companies believed that any business success is determined by their business policy, market potential, market share, research and development, innovation and human resources. The prospective for Environmental, Social and Governance (ESG) factors to influence business success was not considered. These factors were neither discussed in academic institutions nor reflected in company’s organizational structures. The whole idea of sustainable factors became popular soon after the UN conference in the year 1992.
Its transformation to business environment was first found by John Elkington’s TBL “Triple Bottom Line” or the 3Ps – People, Planet, Profits. As per Elkington, business success is not only managing conventional business goals such as value or wealth maximization but also includes environmental, social and governance issues like employee relationship, employee safety, customer satisfaction, supplier relationship, stakeholders rights, leadership, human rights and climate change etc., now it is called as sustainability issues. From investors standpoint sustainability includes risk as well as an opportunity. They seek companies to disclose their performance on sustainability and investors invest their funds toward stocks based on ESG factors. A Few major global disclosure frameworks includes Global Reporting Initiative (GRI), Integrated Reporting (IR), Sustainability Accounting Standards Board (SASB), CDP (the Carbon Disclosure project) etc.
ESG funds have grown extremely and U.S. sustainable funds reported $15.7 billion in net inflows for the third quarter of 2021, as of September, 2021 assets in these funds totaled more than $330 billion (Morningstar). In ESG investing, an investor uses a socially concerned standard to screen the company’s operations and make the investment decisions in such companies.
The benefits of ESG cannot be underestimated, as it is showing significant impact on social issues, while evaluating for the best in class companies to invest, investors asses their ESG quality, ESG score and ESG ratings and also based ESG ratings companies will be classified into leaders, average or laggards and also higher weights will be given to companies with good ESG Scores, which in turn help the investors to take investment decisions.
A study conducted by the European multinational financial services company Allianz found that 64% of new millennial investors were likely to make investment decisions based on societal problems, with that we can say ESG investing is growing its roots firmly.
Though ESG finance is growing there are a few barriers such as investor’s behavior, ESG reporting, risk, branding, limited corporate resources etc., are slowing down the pace of growth. Large cap companies can easily overcome the barriers. However, for MSME’s with lack of capabilities and resources to deal with the issues makes it challenging. The popularity of ESG investing rely on creating sustainability standards which makes world a better place. In spite of the limitations, ESG scoring and reporting has the potential to unlock a significant value creation in the long run.
Assistant Professor, DSCE – MBA