The rise of conscientious consumers and global trade dynamics has compelled leading brands to prioritise ESG compliance among their suppliers
In January 2023, the World Economic Forum (WEF) released the Global Risk Report 2023, in which it highlighted that in the coming decade, the world is likely to face a tumultuous mix of environmental and societal challenges, driven by intricate geopolitical and economic shifts.
On the environmental front, "biodiversity loss and ecosystem collapse" is set to be one of the fastest-deteriorating global risks in the next ten years. It noted that the path ahead appears challenging, marked by a complex interplay of global forces.
When the crisis is looming large, it’s high time companies, which are the backbone of the economy, must evaluate the ESG (economic, social, and governance) risk.
What’s driving ESG values in companies?
The push for integrating ESG (Environmental, Social, and Governance) factors into business practices has been building up for two decades, gaining significant momentum in recent years. Several key trends are evident across various sectors:
1. Climate Change Realities: The mounting evidence of climate change, marked by an increase in natural disasters, supply chain disruptions, and resource limitations, is compelling businesses to integrate ESG considerations. The economic impact of these factors serves as a driving force for incorporating ESG measures into future-proof business operations.
2. Product Stewardship Focus: Businesses are facing heightened pressure from diverse stakeholders to take responsibility for their products and associated supply chains. Stakeholder activism, investor apprehensions, and the risks linked to growing customer awareness are driving the development of ESG metrics. This shift emphasises aspects such as waste management, extended producer responsibility, and environmental footprint in business resilience strategies.
3. ESG at the Core of Strategy: The unconventional threats posed by climate change, environmental issues, and heightened social awareness are fueling the demand for the integration of ESG factors into the core of proactive business strategies. Recognising the impact of these factors, businesses are aligning their operations with ESG principles for long-term resilience.
4. Shifting from Shareholder to Stakeholder Focus: Traditionally, businesses primarily catered to investors and shareholders with a primary goal of driving profits. However, the realisation of the impact of non-tangible parameters on profitability has prompted a shift from a shareholder-centric model to a stakeholder-centric approach. This transition involves an enhanced evaluation of ESG factors to address the diverse needs of various stakeholders and ensure the resilience of the business.
What's the value proposition of ESG?
Navigating the current global transformation marked by uncertainty requires businesses to embrace the ESG framework, ensuring long-term value by prioritising profits, people, and the planet. Beyond corporate responsibilities, integrating ESG factors becomes imperative, addressing material issues for resilience in the short, medium, and long term.
This adaptation is nuanced, considering factors like industry, business model, geography, scale, supply chain, investor base, core values, and strategy. Creating lasting value transcends mere financial metrics, urging a holistic view. Companies are shifting towards integrated profit-loss statements, aiming to correlate and monetize the impacts of operations on various capitals, safeguarding against immeasurable risks.
International Businesses Show the Way
Traditional competitive advantages fall short in an era where sustainability takes centre stage. The rise of conscientious consumers and global trade dynamics have compelled leading brands to prioritise ESG compliance among their suppliers.
For instance, tech giant Apple is on a mission to achieve a carbon-neutral global supply chain by 2030. Major suppliers like Foxconn are actively involved in Apple's clean energy programme. As of April this year, 85 percent of Apple's direct manufacturing spending is committed to using renewable energy. The company's suppliers are collectively supporting 13 gigawatts of active renewable energy projects, with pledges to reach a total of 20 gigawatts.
In this landscape, where international buyers prioritise environmental and social aspects in supply chain management, Indian enterprises must fully embrace ESG principles to stay competitive at the global stage. Also, massive skilling efforts need to be undertaken, like the 1M1B’s Sustainability Accelerator Programme in partnership with ABFRL.
Government: A Key Enabler
Government officials and policymakers understand ESG issues, much like corporate leaders. Laws and policies about sustainable business practices are crucial for dealing with these issues. A study by the NSE on the ESG disclosures of 50 listed companies supports this idea.
The study found that companies were better at disclosing policies and governance factors than environmental and social factors. This is because, in the last two decades, governance reforms have become laws, and regulatory authorities have mandated many policies.
Big companies in India are doing well in responding to government ESG initiatives. They're also getting a nudge from investors to follow ESG rules and share information about it. A survey by CRISIL on 586 Indian companies shows that, in the fiscal year of 2021, most of these companies improved their ESG scores compared to the previous year. This is because they are disclosing more information and doing better in various areas.
The government might introduce tax incentives, like deductions or credits, for companies engaging in ESG initiatives, renewable energy projects, or sustainable technologies. Such measures could motivate businesses to channel resources into sustainability endeavours.
Additionally, promoting the issuance of green bonds and sustainable financial products by providing tax benefits or subsidies to companies seeking capital for environmentally responsible projects could foster increased investment in sustainability.
(Dr. Naresh Tyagi, Chief Sustainability Officer, Aditya Birla Fashion and Retail limited.)