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In a world where climate change has become a matter of concern, it is important that big corporations and companies become more sensitive to how they are directly or indirectly affecting the environment. ESG which stands for Environmental, Social, and Governance objectives are factors that companies have started taking into account to show the amount of ecological and sustainability impact they cause.
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Nowadays customers and investors alike prefer companies and products that show an interest in developing their ESG propositions. This trend of companies reporting their ESG has increased substantially since the 1990s. Having ESG-focused policies in a company can increase engagement and make relationships between the corporation and different communities like investors, consumers, local labour groups, etc better.
As these companies focus on labour conditions and the rights of local communities much more than traditional set-ups. Making sure that a company is upstanding on all these different forefronts not just fosters better relationships but ensures better profits for the company. These profits can even increase manyfold in the future.
How companies benefit from ESG:
1. REDUCTION IN LEGAL AND STATE INTERVENTION
Corporations are prone to state intervention in case of irregularities but when a company has a strong sustainability factor, external pressure substantially eases. ESG has reduced companies from being adversely affected by government policies and actions. This will only prove to be true in the future because more and more countries are adopting sustainable frameworks.
2. BETTER EMPLOYEE PRODUCTIVITY
Companies with good ESG propositions attract quality employees. Moreover, it also helps keep the existing employees. When employees are able to create a real-life impact through their work they feel a sense of purpose which increases their motivation to work.
Increased motivation results in better productivity for the company.
3. FARSIGHTEDNESS
These companies pay off in the long term. As the world is getting more and more aware of the climate crisis, governments and legislators all around the world are looking for more sustainable and green practices. In the future, ESG-centric companies will be able to navigate legislation surrounding the climate much better than others.
4. PUBLIC PERCEPTION
Companies that focus on their ESG propositions create a “sustainable” or “green” brand image. This attracts consumers that are environmentally conscious. As the general public is becoming more aware of living sustainably the number of people that would buy from these companies is also increasing. So having an eco-friendly brand image increases consumers.
ESG benefits companies in a number of ways but it also matters to investors that put funds into the company. Investors do look at profits before investing in a company but many nowadays are also looking at the social impact the companies can have. Apart from the social impact and profit, there are many other ways that a good ESG portfolio benefits investors.
Here are some ways a good ESG proposition benefits investors:
1. THE INCREASED RETURN IN LONG TERM
Material ESG is the relevant factor important to a business’s sustainability and performance. The factors usually vary according to the industry, region, and also other factors. These can include social issues like labour work quality, safety, environmental impact, etc. Portfolios with material ESG have provided increased returns to their investors at a lower risk compared to conventional non-ESG portfolios.
2. BETTER AT MEETING LONG-TERM INVESTMENT GOALS
As mentioned earlier these companies are future-ready hence investors are not on the downside. These companies will give better returns and are low risk compared to non-ESG companies.
3. BETTER AT PROVIDING EFFICIENCY
These companies are better at expansion because they are better at getting government approvals. They also get more government support than other companies. Reduced waste, material, and costs make the workings more efficient.
4. COST CUTS
ESG-centric companies work with lesser consumption of energy. For example: making packaging more sustainable like removing a plastic fork from cup noodles not just reduces waste but also reduces cost. This results in a lower capital investment compared to companies that produce a ton of waste and then spend even more money on waste disposal.
While these benefits are a product of the correct employment of ESG policies, consumers and investors should be careful about companies that may use sustainability as a mere marketing tactic.
Looking at companies' ESG profiles can be a good way to look at the ecological and social impact they have but companies use marketing tactics and portray a facade of sustainability while being anything but eco-friendly. Greenwashing can be an issue in ESG funds as research shows ESG funds include companies that are far from socially and environmentally responsible. Because there is no standard methodology behind ESG ratings, false claims also become an issue for investors.
With the increase in environmentally conscious consumers and investors companies have started using various tactics to lure in customers. It is important that investors and consumers are vigilant about a company’s ESG policies and do not fall prey to greenwashing. ESG can benefit the environment, the company, the investors, and the consumers. Making it a win-win strategy for all parties involved.
BY CHAITANYA NAIR
TEAM GEOSTRATA
info@thegeostrata.com