Eight reasons why corporates should prioritize sustainability and ESG
-Anurit Kanti
Word count- 1500 words
We live in a complex world, which is still recovering from the ravaging effects of the pandemic, is
dealing with poverty and unemployment, and most of all, is increasingly under the threat of climate
change and environmental apocalypse. Marginalized communities are exposed to greater risks and
the planet is reeling from degradation of its lands, oceans, and forests.
While there is significant traction from governments and communities across the world to commit to
holistic sustainable development and make progress towards Agenda 2030 of the United Nations, the
private sector cannot remain a by-stander in our collective pursuit for a sustainable future. In fact,
corporates and companies are becoming critical stakeholders in this pursuit, with sustainability and
ESG considerations becoming more than just compliance, but integral components of corporate
strategy. What were mere buzzwords, perhaps a decade ago, are increasingly finding their way into
boardroom narratives and business operations. But the efforts for Net-Zero, ESG integration and
sustainability-focused strategies are not relevant because they are the right thing to do, but because
there is a legitimate business case for prioritizing them, including for the bottom line of the company
(in addition to the triple bottom line of People-Planet-Profit)
Let’s explore why it is of utmost importance for corporates and companies to prioritize sustainability
and ESG.
1) Access to finance
One of the primary reasons why corporates should prioritize ESG, including reporting on it
through internationally recognized disclosure frameworks like GRI, SASB, TCFD, CDP, ISSB is
the plethora of ESG funds, which have skyrocketed since the pandemic. As per Bloomberg
Intelligence, ESG funds are on their way to cross the $50 trillion mark by 2025, comprising of
more than a third of total assets under management. With ESG reshaping the financial
industry and increasingly becoming a primary consideration for investors seeking to deploy
funds in the private sector, corporates with better ESG metrics, ratings and performance will
have greater access to this large chunk of capital. The biggest investment firms like Blackrock
(as stated in CEO Larry Fink’s famous letter in 2020) are also focused on companies with good
sustainability practices and at COP26, the Glasgow Financial Alliance for Net-Zero created a
large of pool of ESG-focused finances, amounting to trillions of dollars. For corporates to
capitalize on this rising trend and get easier access to investments, prioritizing
ESG/sustainability is a must.
2) Mitigating future risks
ESG and sustainability are also becoming primary considerations when it comes to Enterprise
Risk Management of firms. Integrating ESG, sustainability and climate risks in the risk
management process of companies is now a best practice, and leading disclosure frameworks
like GRI and TCFD have special focus on how ESG related risks are identified, reported,
managed, and mitigated. Even leading ESG rating agencies like Sustainalytics (based on which
many investors choose to deploy funds), measure a company’s exposure to ESG risks. But
beyond this, focusing on ESG is integral in mitigating future risks, when one considers
scenarios of how ignoring an environmental or social risk has caused significant damage to
various companies. As per research done by leading rating agencies, companies which have
faced high to severe ESG incidents have lost 6% of their market capitalization on average. A
pre-emptive focus on ESG can therefore negate any controversies which may arise and can
significantly mitigate future risks.
3) Linkages to financial performance
While generally a prioritization and focus on ESG/sustainability provides financial returns on
a long-term horizon, there is ample empirical evidence to suggest that such returns, and
better financial performance has been observed for ESG-focused companies even in the shortto-medium term. At the pandemic’s initial phase, stock market reactions suggested that
companies with better crisis response measures (which fall under the purview of ESG
considerations like Human Capital, Supply Chain, Products/Services ESG sentiment etc.) were
associated with 1.4-2.7% higher stock returns (Cheema- Fox et al, 2020) and a detailed study
by NYU Stern and Rockefeller Asset Management also uncovered a positive relationship
between ESG prioritization and financial performance, after aggregating evidence from over
a thousand studies on this subject between 2015 to 2020. Studies have also indicated that
managing for a low-carbon future, a critical component of ESG agendas, have improved
financial performances of companies. Even McKinsey has suggested that a dedicated
sustainability strategy can reduce costs and affect operating profits by as much as 60%.
Furthermore, minor aspects of ESG prioritization like having more women in
leadership/management roles (better gender ratios) have empirically been proved to result
in better financial performance, among many other ESG considerations.
4) Regulatory requirement
While ESG being a regulatory requirement reduces the phenomenon to mere compliance, it
is important to note it as a separate reason for prioritizing ESG, to give a larger context of its
increasing relevance in the regulatory framework for a plethora of countries/governments.
While top listed companies in India are now mandated to report on business responsibility
and sustainability by SEBI, CSR reporting (which is a part of the social component of ESG) has
been a compliance for large companies for almost a decade. Even the SEC in USA has proposed
that listed companies must mandatorily disclose on ESG, while the European Union has made
significant strides in including ESG in its regulatory framework for corporate compliance. This
trend of ESG prioritization and disclosures being a part of regulatory requirements is only set
to increase as more governments come on board for climate action and sustainable
development, and COP27 in Egypt later this November might give a boost to this important
trend, making it worthwhile for companies to start focusing on ESG pre-emptively.
5) Stakeholder activism
With more and more companies joining platforms like the World Economic Forum, or various
industry associations, a focus on ESG allows the private sector to engage in activism across
the spectrum of stakeholders, and to lead by example in helping shift the narrative, and steer
actual on-ground efforts to greater levels of climate action and accelerating holistic
sustainable development. Companies which focus on ESG transparently can actually ‘walkthe-talk’ and negate any accusations of greenwashing, while motivating other stakeholders to
join in their efforts. Stakeholder activism enabled by corporate ESG prioritization also has
intangible positive impacts on the collective pursuit for a sustainable future, whether it be
through governments, educational institutions, communities, and individuals.
6) Employee attraction/retention
There is also ample evidence to show that millennials are more attracted to companies which
are focused more on sustainability. Surveys have not only gone on to suggest that around 40%
of millennials choose a job because of the company’s socially and environmentally responsible
practices and culture, but even further suggest that they are willing to even take a pay cut to
work in a sustainability-focused company. While employees are definitely more attracted to
organizations prioritizing ESG/sustainability, this prioritization also eventually helps
organizations retain talent, given that a critical component of ESG is how the people within
and outside the company are treated. With better employee policies like more training, higher
safety levels, elimination of gender biases and focus on human rights, a better workplace is
created for employees, who tend to stay longer in such companies which create an ESGfocused culture.
7) Shifting consumer demands
Consumers too are now increasingly choosing to buy products/services from companies with
more ethical practices, and those which have a higher standing when it comes to social and
environmental responsibility. Nielsen studies have shown that 66% of consumers would spend
more on products from a sustainable brand, while 81% of global consumers strongly feel that
companies should help improve the environment. The change in consumer consciousness has
increased the value of sustainability-focused companies as the ‘go-to’ choice, which will
increase as awareness on related issues percolates through every segment of society.
8) Storytelling and brand reputation
Lastly, companies which prioritize ESG/sustainability, to put it simply, have a better story to
tell. From a better brand reputation to more material for marketing and public relations,
sustainability-focused companies have a lasting competitive advantage, enabled by
embedding ESG considerations into business models and corporate governance. Just putting
a statement of commitment to carbon neutrality out there not only enhances brand value but
has also led to actual increase in stock values (though a follow-through on such commitments
is critical).
The corporate world is moving away from the concept of profit generation for shareholders and
moving into value creation for stakeholders. Not only is it the right thing to do, but it also makes
business sense, with corporates which prioritize sustainability and ESG being in the best position to
capitalize on the multi-trillion-dollar business opportunities offered by investments in this realm (for
example, China’s agenda to mitigate air pollution created investment opportunities worth over $3
trillion through 2030 as per a report by Bluetech Clean Air Alliance). The time is now, for corporates
to jump on the ESG/sustainability bandwagon, or forever get left behind, as a laggard. The opportunity
for an all-hands-on-deck approach for a sustainable, inclusive, and prosperous future, is nigh upon us,
and corporates can, for once, take the lead.