3 minute read 4 Aug 2021
The ESG advantage in Long-Term Investing

How ESG factors can help future proof Indian businesses

By Shailesh Tyagi

EY India Climate Change and Sustainability Services Partner

Committed to ESG, decarbonization and safety performance transformation. Advocate for workplace diversity. Holds a blackbelt in Taekwondo and a fitness enthusiast.

Contributors
3 minute read 4 Aug 2021

Environmental Social Governance (ESG) is gaining traction as an important strategy for long-term value creation of businesses.

The Indian business scenario is going through a phase of uncertainty coupled by amplification of several natural and social disruption making Indian businesses to rethink their strategy. ESG as a concept is evolving in creating long term value for all the stakeholders. The COVID-19 pandemic has reinforced the importance of ESG framework as a key approach to long term business resilience. Businesses are thinking to go beyond non-financial reporting and start reporting in an integrated profit and loss approach, which attempts to correlate or monetize the positive and negative impact of business operations and products through a range of capitals, thus helping in long-term value creation.

What is shaping the post-COVID scenario?

The COVID-19 pandemic has acted as a strong trigger to reshape global economies and how businesses operate. By exposing the fragility of the current businesses and economic models, it has forced the world to hit the reset button and think. Future proofing of business by enhancing business resilience is what business are looking at presently.

If we look at the top five Global Risks as depicted by World Economic Forum, the top five risks have shifted from economic focus to environmental and societal focus. In the recent period, cyclones, earthquakes and other alarming natural calamities indicate that focusing on economic risks is not just enough. To future proof business against uncertainty, ESG risk evaluation is equally important.

Global risks in terms of impact an likelihood
The imperative for incorporating ESG factors has been mounting for two decades but has been growing on an accelerated path over the last few years.

Key ESG drivers:

The imperative for incorporating ESG factors has been mounting for two decades but has been growing on an accelerated path over the last few years. Key trends which are being witnessed across sectors include:

  • Growing evidence of climate change: Increasing frequency of natural disasters, supply chain disruptions and resource constraints and their economic impact has been fundamental in giving impetus of integration of ESG to futureproof business.
  • Product stewardship: Businesses have been under increasing pressure from different stakeholders to be responsible for the product and the associated supply chain. Stakeholder activism, investor concerns, risks associated with customer awareness has been at the core of developing ESG metrics for business resilience and focus more on aspects such as waste management, extended producer responsibility and environmental footprint.
  • ESG moving to core: Unconventional threats from climate change, environmental challenges and social awareness together have created the demand for integration of ESG factors into proactive business strategy.
  • From shareholder to stakeholder: Conventionally, businesses catered to specifically investors and shareholders and drive profits. However, the impact of other non-tangible parameters on profits is clear now and hence the focus has shifted from the shareholder to a stakeholder model to account for diverse needs of different stakeholders through enhanced ESG evaluation to ensure business resilience.

How can ESG deliver long-term value?

In this global phase of transformation coupled by volatility and uncertainty for the businesses, ESG framework provides businesses long term value by holistically safeguarding profits, people and the planet. Imbibing ESG factors into business therefore becomes necessary as it goes beyond corporate responsibilities and focus on holistic material issues to build resilience in short medium and long term.  These aspects vary basis the industry of operation, business model, geography, scale of operations, supply chain, investor base, core values and business strategy of the organization.

Creating a long-term value goes much beyond mere financial profit and loss but we need to look at the bigger picture. Integrating non-tangible factors and measuring the impact created helps in future proofing of business with respect to the risk that cannot often be measured. Therefore, companies are moving from non-financial reporting to integrated profit loss statement which attempts to correlate or monetize the positive and negative impacts of the business operations and products through a range of capitals.

EY total value approach

To support such efforts of organizations, move towards integrated value statements, EY has developed the Total Value approach to address this need and measure the value created by the company, the value it shares with its stakeholders and the broader impact of the company on society at large. A Total Value analysis provides insights on the monetized impacts, outcomes and their materiality.

Total value methodology

While methodologies such as Total Value provide a framework for organizations to calculate the overall impact, there remains a necessity to act, transform and implement the transition towards an ESG agenda, which requires unusual speed from all actors. Market demand investors to integrate ESG risk rating and related non-financial parameters in their assessment.

Total value methodology

Summary

An ESG centric approach has helped investors and organizations unearth hidden risks in environmental and social aspects, mitigate them and identify new opportunities, which may not be possible from conventional approaches. The relevance and value of ESG is also clear from how the markets reward ESG focused companies as compared to traditional players.

About this article

By Shailesh Tyagi

EY India Climate Change and Sustainability Services Partner

Committed to ESG, decarbonization and safety performance transformation. Advocate for workplace diversity. Holds a blackbelt in Taekwondo and a fitness enthusiast.

Contributors