Why ESG Matters

"Environmental, Social, and (Corporate) Governance" (ESG) is increasingly gaining more and more attention. Therefore, I attended an online course from Wharton and also did some reading to get myself further familiar with this topic and improve my knowledge beyond a cursory understanding. This short note has a quick summary of my learnings.

Investors have started paying attention to ESG and a lot of investment funds are going towards businesses that have a good ESG performance and track record. One estimate puts the value of the global ESG assets under management above $35 trillion last year and to exceed $53 trillion by 2025, representing around a third of the $140.5 trillion in projected total assets.

An estimate puts a cost of USD 50 trillion to achieve net-zero emissions. There is a view that the governments alone will not be able to foot this huge bill, and therefore all stakeholders (businesses, investors, consumers, employees) may need to collectively participate and make this world a better place.

At the same time, the pursuit of ESG is not without tangible benefits. While the frameworks for developing the correlation between ESG performance and share value performance continue to evolve, research outcomes indicate that the companies with favorable ESG impact have outperformed the market in terms of stock value, and financial performance. A few points where good ESG performance results in tangible business outcomes are listed here:

• Sustainable products attract ESG conscious customers; Organizations that have stellar sustainability performances will be able to sell their products at a premium to a segment of customers who value ESG
• Focusing on sustainability will also help businesses to reduce costs. Using returnable pallets and packaging materials, reducing material in products through value engineering, reducing water consumption, generating power using solar panels, optimizing inbound and outbound logistics, using rail freight over road freight, etc., help improve sustainability while reducing costs significantly.
• Firms that focus on sustainability will be treated favorably by the regulators and local communities, and the ease of doing business goes up.
• These firms will also be able to attract environmentally conscious Gen Z employees to work for them.

I also want to point out a somewhat prevalent contrarian argument in certain sections of the investment community and fund managers that a focus on ESG by investors diverts funds away from companies that have environmental and social problems and leave them without the wherewithal to address those pressing problems. I have now chosen not to dwell on this particular aspect, and focus on the positives.

Since ESG is an important subject, and an interesting one as well, I am planning to do further reading on the same. The following are the books on my desk and kindle, which I will summarize after reading:

• Polman, Paul, et al. Net Positive. Boston, MA, Harvard Business Review Press, 2021
• Rajan, Mukund, et al. Outlast. Noida, India, HarperCollins, 2021

Views are personal.

#ESG #Sustainability #UNSDG #GRI #wharton