In the past two years, the pandemic has been a catalyst to emerging trends. One of the most prominent of these is conscious consumerism.
More than ever, consumers today want to know where the products they use come from, how it was produced, and whether the company that produces them lives up to the commitment of protecting or at least not harming the planet and society.
Impossible Foods (a company that makes animal-free “meat, dairy, and fish” products) is a case in point. It has seen a drastic increase in demand for their products because of their promise that they are carbon-negative, or put simply, they use significantly less natural resources than their operations require.
There is also growing evidence that investors, such as Blackrock, are fully aware of consumer demands for sustainable practices. They have responded by investing in companies that prioritize their Environmental, Social, and Governance (ESG) practices.
Many businesses, however, still wonder whether it is worthwhile investing in ESG practices. They wonder if it is a passing trend and an exercise, like CSR, full of good intentions but ultimately meaningless because it does not contribute materially to the bottom line.
This is where a deeper understanding of ESG may prove beneficial. According to the Corporate Finance Institute, ESG is a framework for assessing the impact of the sustainability and ethical practices of a company. Done well, it allows an organization to identify risks and opportunities that would materially affect its bottom line.
Unlike CSR, which is usually about how a company communicates their ideal values to their public, often through philanthropy that has little to do with the profitability or sustainability of a company, ESG, on the other hand, is more about setting up actions and measurable outcomes.
The Environmental pillar in ESG is about how a company’s activities impact the environment and how it manages environmental risks such as climate change and its discharge of greenhouse gasses. The Social pillar looks at how a business interacts with communities where it operates, which can be seen from such policies regarding diversity, equality and inclusion (DEI), fair pay, as well as human rights issues. The Governance pillar relates to internal practices and policies that lead to effective decision making and legal compliance, a reflection on how effective the top management leads a company.
The pandemic also served to underline the connection between ESG practices and long-term value creation. High social standards and good company governance emerged as key indicators of resilience against the pandemic’s impact at both country and company level.
When the shutdown happened and there were shortages in many products because of negligence of ensuring a proper supply chain, only businesses that had good relationships with the suppliers and local communities – an ESG criteria – could maneuver their way around without compromising their ability to keep the production going.
In return, companies performing on ESG practices have demonstrated higher financial growth and optimization, lower volatility, higher employee productivity, reduced regulatory and legal interventions (fines and sanctions), top-line growth, and cost reductions, even when there is an economic turmoil due to the pandemic.
This is shown in the recent analysis published by BlackRock. The analysis highlights that investment funds tracking the performance of corporations considered to be more committed to ESG issues have fared far better than others during the COVID-19 crisis.
ESG therefore needs to be taken seriously by businesses because we live in a world of increasingly more rapid and profound changes. Many of these changes had been in motion and the pandemic accelerated them and businesses would do well to prepare themselves to face the risks and opportunities that these changes will bring. The ESG framework provides them with the thinking and tools to anticipate and plan for the future.
Written by Dinda Dwita Puspasari, Consultant
Corporate Finance Institute. ESG (Environmental, Social and Governance). Accessed from https://corporatefinanceinstitute.com/resources/knowledge/other/esg-environmental-social-governance/.
Cox, Josie. Forbes. Resilience In Crisis: Coronavirus Reveals Why Businesses Must Do Good To Do Well. Accessed from https://www.forbes.com/sites/josiecox/2020/06/08/climate-crisis-coronavirus-b-corp-business-esg-do-good-to-do-well/?sh=603b7c7b5578.
KPMG. How ESG practices help to enhance corporate resilience. Accessed from https://home.kpmg/my/en/home/insights/2020/06/kpmg-impact/how-esg-practices-help-to-enhance-corporate-resilence.html.
EY. Why ESG performance is growing in importance for investors. Accessed from https://www.ey.com/en_gl/assurance/why-esg-performance-is-growing-in-importance-for-investors.
EY. Three ways ESG factors can make portfolios more resilient post COVID-19. Accessed from https://www.ey.com/en_gl/financial-services-emeia/three-ways-esg-factors-can-make-portfolios-more-resilient-post-covid-19.