3 minute read 27 Jun 2022
ESG trends

How ESG megatrends and opportunities are shaping our future

Authors
Chaitanya Kalia

EY India Climate Change and Sustainability Services Leader

Committed to sustainable development, a climate change expert, advisor on non-financial reporting. Digitally savvy and a nature lover. Amateur cyclist, swimmer and an ornithologist.

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.

Saunak Saha

EY India Climate Change and Sustainability Services Associate Partner

Supporting businesses with innovative digital solutions and creating long-term value. Passionate about leading the transition to a low carbon world. Sustainability coach.

3 minute read 27 Jun 2022

Each trend is a stepping-stone toward helping corporates recover from the pandemic and achieve the 2030 SDG goals.

In brief

  • At the United Nations COP26, India listed out five bold and ambitious commitments to combat climate change with an aim of achieving net-zero emissions by 2070.
  • During the conference, India also launched the ‘One Sun, One World, One Grid’ (OSOWOG) initiative with an aim to harness solar energy.
  • In September 2021, India and the US launched the “Climate Action and Finance Mobilization Dialogue (CAFMD)”, aimed at providing both the countries an opportunity to renew collaborations on climate change.

The emerging Environmental, Social and Governance (ESG) mandate in corporate governance presents a new challenge for companies in India. In a stakeholder-driven approach, the ESG requirement for each company is different and must be fine-tuned to suit stakeholders with whom a company interface. The Indian Government is also stressing upon the need to adopt ethics, transparency, and accountability among businesses to promote responsible business practices. Such an increased focus on ESG would allow more companies to be ESG-compliant, ultimately leading towards sustainable growth for future generations and contributing towards value creation for the companies as well as their stakeholders.

The onset of the COVID-19 pandemic has not only altered the way markets function but has also forced enterprises to re-evaluate their approach towards business sustainability. It has changed the definition of success and vastly rewritten the rules of the market. The crisis has forced business enterprises to re-examine their role in society and consider mitigating the impacts their operations might have caused on the environment and society at large. While the after-effects of the pandemic continue to affect many sectors, sustainability remains no different. With the ESG agenda steadily gaining momentum over the past few years, the pandemic has accelerated the pace at which companies need to pay higher emphasis on it. This has been reiterated by the World Economic Forum Survey 2020 conducted for corporates across the globe.

According to the recent findings, 23% of the respondents believe that the importance attached to social considerations has increased by 20% ever since the onset of COVID-19.1

This has also brought the FinTech industry into limelight with corporates shifting majority of their operations towards a virtual platform to minimize human interaction. Clearly, the time is ripe for the financial sector to place an increased focus on building an economy that is in tandem with the philosophy of the ESG principles. There has been an increased understanding of the fact that an economy, built upon protecting the environment and social rights of the public at large, will be able to sustain itself in the longer run. It will be vital for policy makers, especially in the developing economies, to ensure that rapid growth does not happen at the cost of hampering the environment and social rights of citizens.

This is where the role of sustainable finance becomes significant in the coming decade. Policy makers have become significantly cautious in the post pandemic world, and this has led to a wide variety of ESG regulations being passed and implemented across various nations. Studies have also shown that some ESG funds outperformed the S&P indices, reiterating that sustainable and strong mechanisms of governance will pave the way forward. Results from a renowned research firm, Morningstar, showed investors pouring in a whopping US$45.6 billion into ESG funds in the first quarter of the year, compared to a total outflow of US$384.7 billion.2

It is interesting to note how a decade back, financial performance of the company was the only criteria prioritized by the investors while determining a company's worth. However, with the renewed legislative and market focus on ESG, it has become imperative for the stakeholders to focus on the environmental and social performance of the company as well. Forward thinking enterprises have already initiated the process of integrating responsible business practices into their operations. While some enterprises have given more importance to mental health issues, few others have been observed to be focusing on climate-friendly initiatives. While the paths adopted by various organizations might be different, the end goal remained the same — to become sustainable and resilient.

With countries like the United Kingdom (UK), the United States (US) and the European Union (EU) leading the ESG agenda across the globe, it will not be surprising to see foreign investors looking to invest in developing countries to demand for the ESG performance of the companies. Factoring in ESG risks in business operations would not only be important from the lens of human rights but also shield the businesses from regulatory, litigation and reputational risks in the coming times.

Based on the current market analysis, we have identified broad trends that are important in the current times. Each trend shall be a steppingstone towards the roles that private sectors will play in the coming years to not only recover from the pandemic but also to achieve the United Nations Sustainable Development Goals (SDGs) of 2030.

Due to the economic crisis caused by COVID-19, investors are getting increasingly cautious about their investments and are focusing on the company’s sustainable practices to safeguard their investments.
Chaitanya Kalia
EY India Climate Change and Sustainability Services Leader

The past few years have seen a rapid acceleration in the ESG agenda being taken up by leading organizations across the globe. The key trends which have been observed spanning across multiple sectors include:

Embedding ESG in business operations

Notwithstanding the worldwide disruptions, including the global pandemic, which led to major economic and societal shocks, investments in ESG funds have continued to increase massively and are predicted to soar more in the coming decade.

Responding to climate change

COP26 has provided the impetus for policymakers and businesses to address climate change issues on a priority basis. While environmental concerns have not been traditionally the top priorities for the market, the renewed focus on environmental initiatives by leading countries like the EU, the US, and the UK has changed the dynamics of how stakeholders will respond to climate change issues in the years to come.

Increased regulations

It is crucial for businesses and investors to embed responsible business practices in their operations. This has gained greater significance with many jurisdictions across the world coming up with ESG reporting and disclosure regulations to make the corporates more accountable.

Shifting consumer preferences

The millennial population is becoming increasingly aware of the environmental and social issues that exist in society. It will not be surprising if the next generation goes so far as to boycott products and companies that are not founded on ESG principles.

Protecting human rights

Instances of discrimination, inequality, and racism have increased manifold in the past few years. Businesses have come under major scrutiny, not only from legislators but also from the civil society. Businesses have started adopting and placing greater focus on diversity and inclusion programs in order to remain socially relevant.

In a bid to meet their decarbonization goals, many large Indian corporates with a global footprint have begun instituting internal carbon prices, energy optimization, net-zero commitments, and green initiatives.
Shailesh Tyagi
EY India Climate Change and Sustainability Services Partner

Summary

ESG is the new buzzword in the business world. Though it has been brewing for a while, but in the post-pandemic world, it has become a mainstream agenda. Driven by the united demand of employees, investors and customers, stakeholders have forced companies to take measures against climate change and social injustice.

With such a context, the knowledge paper unfolds some of the ESG trends that may impact businesses in the future. They range from evolving regulations and changing consumer preferences to advancing social issues, such as diversity in the workforce and leadership and human rights.

 

About this article

Authors
Chaitanya Kalia

EY India Climate Change and Sustainability Services Leader

Committed to sustainable development, a climate change expert, advisor on non-financial reporting. Digitally savvy and a nature lover. Amateur cyclist, swimmer and an ornithologist.

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.

Saunak Saha

EY India Climate Change and Sustainability Services Associate Partner

Supporting businesses with innovative digital solutions and creating long-term value. Passionate about leading the transition to a low carbon world. Sustainability coach.