Summary: Today, other than profits, customer satisfaction, employee experience, and business disruptions, organizations are under pressure to develop sustainable products & services and conduct responsible social engagement. In the Environmental, Social, and Governance (ESG) path, organizations will continue to evolve their ESG and sustainability priorities. Increasingly, customers are choosing to spend their money aligning with their values. Most individuals, over 60%, are now making purchasing decisions based on ethical and sustainable considerations, a trend growing by 10% annually. Furthermore, they are willing to pay a premium for products that are made sustainably and ethically. In this article, Dr. Mythili kolluru, a prolific writer, Strategist, and Professor of international business, discusses her research on key trends to watch out for in any organization’s ESG journey.
Introduction
ESG stands for Environmental, Social, and Governance. It is a framework for evaluating the sustainability of an organization. The concept of ESG began in the 1960s when socially responsible investing (SRI) was practiced. SRI is a type of investment that excludes stocks of products engaging in business activities like tobacco products or involvement in the apartheid regime. In the 1990s, SRI evolved to include Environmental, Social, and Governance (ESG) factors. This approach became more holistic to investing as it considered the ESG performance of organizations when making investment decisions. James Gifford is the person to be credited with conceptualizing the concept of ESG in 2013.
Grifford’s research paper on ESG was influential in bringing ESG to the business community. His research paper is the first academic work that linked ESG factors to financial performance and equity pricing. The concept of ESG is still evolving, and it’s becoming increasingly important. Investors are in search of organizations with ESG and sustainable practices. Customers are showing a keen interest in buying from companies that are committed to ESG practices. And other stakeholders like employees, suppliers, and communities also demand that organizations integrate ESG into their mainstream business.
ESG key trends and insights
1) Climate change and sustainabilityClimate change and sustainability are intertwined and have become increasingly important in recent years. This ESG issue will continue to be the top priority in 2023. The sustainability approach has resulted in increased use of renewable resources. The concept of circular economy has also gained traction. A circular economy reduces resource consumption and promotes sustainable production and consumption patterns. Companies must take actionable measures to reduce their carbon footprint and transition into a low-carbon economy. Some approaches could be renewable energy, energy efficiency, and waste reduction.
2) Diversity, equity, and inclusionThis is another crucial area for businesses to concentrate on, as customers, employees, and other stakeholders demand that companies honor their commitment to diversity and inclusion. Companies must create an inclusive and equitable workspace for all employees irrespective of race, gender, ethnicity, sexual orientation, and other factors. The conversation related to diversity, equity, and inclusion is rapidly gaining visibility, and it is positioned to transform and develop further in the years ahead, including beyond 2023.
3) Supply chain resilienceOur dependence on global supply chains was exposed in the COVID-19 pandemic and the war in Ukraine.
Companies must ensure their suppliers are secure, reliable, and high performing. To ensure greater resilience and competitiveness companies need to gain greater control and transparency of supply chains. So that the risks can become manageable, companies will need to ensure that suppliers are sustainable and not contributing to human rights violations or environmental degradation.
4) Data privacy and securityCustomers, employees, and other stakeholders are increasingly concerned about how businesses collect and store data. Companies need to take steps to protect data from unauthorized access and misuse. Companies must be involved in robust data security measures like encryption, firewalls, data backup, and intrusion detection systems. This would demonstrate their commitment to ESG and responsibility to uphold customers’ and other stakeholders’ data privacy and security.
5) Corporate governanceIt is vital for ESG that the board of directors ensure that companies are operating ethically and responsibly.
The board of directors must be independent and accountable. A robust corporate governance system can prevent fraud and corruption, improve decision-making, and protect stakeholders’ interests. Investors are also increasingly looking for companies with strong corporate governance practices.
6) Increasing growth of impact investingIt is an investment that aims to generate financial returns while having a positive or environmental impact. Impact investing is becoming popular as investors know their money can positively impact the world. Nowadays, there are many impact investment funds and platforms, and it is becoming profitable. Some impact investments are microfinance, green bonds, and social impact bonds.
7) ESG data and analysisCompanies can better measure ESG risk and opportunities with ESG data and analysis growth. There is a surge in the supply of ESG data and analytics. Data is being leveraged to generate company ESG ratings and reports. Developing ESG data and analytics will lead to informed decision-making by companies, improve financial performance and mitigate ESG risk.
8) New ESG standards and regulationsAs ESG becomes more mainstream, we will see momentum toward standardized ESG reporting. The development of new ESG trends and regulations impacts business in different ways- companies must invest in ESG compliance, might have to change their business practices, and rethink their risk management strategies.
Some examples of new ESG standards and regulations that are being developed:
- The Taskforce on Climate-related Financial Disclosures (TCFD): The TCFD is an international organization developing a set of climate-related financial disclosures for companies. Regulators around the world are adopting TCFD’s recommendations.
- The Sustainability Accounting Standards Board (SASB): The SASB is a private organization developing industry-specific ESG standards. The SASB’s standards use by companies to report on their ESG performance.
- The International Integrated Reporting Council (IIRC): The IIRC is an international organization developing a framework for integrated reporting. Integrated reporting allows companies to report on financial, environmental, social, and governance performance.
- The ISSB is an independent organization establish in 2021 by the International Financial Reporting Standards (IFRS) Foundation. The ISSB’s mission is to develop global sustainability standards that are clear, concise, and comparable. The ISSB’s criteria will use by companies to report on their environmental, social, and governance (ESG) performance.
9) Increase in ESG-conscious customersA research report states that more than 60% of people base their purchasing behavior on sustainability and ethical criteria.
Customers are prepare to pay more for ethically sourced, sustainably made products and services. A growing community expectation goes beyond net zero to include a more holistic and broader environmental impact. The ESG performance of companies is a critical metric that figures in customer purchasing decisions.
10) Future of work and fair treatment Over the years to come, significant structural shifts will be witnessed across industries to a net zero economy, and we will face ever-pressing climate and societal concerns.
As part of ESG performance, organizations must demonstrate fair treatment and conducive working conditions for their employees across their supply chains. The focus should shift to organizational culture, behavior, employee upskilling, and sustainability programs. As the green economy jobs multiply, recruitment pressures and training will be the major concerns for organizations. Organizations with a robust ESG agenda will have a competitive advantage in employee attraction and retention.
Conclusion
The trends and insights echo the shift toward a new generation of stakeholders inclined to consider environmental, social, and governance factors in investment decisions, corporate practices, and consumer buying. The ESG landscape is rapidly evolving with dynamic expectations and regulations. Organizations must demonstrate high levels of preparedness and adaptability in their ESG journey and pursue sustainability to mainstream ESG. Finally, the goal of ESG is not a mere net zero economy but a thriving and socially sustainable future. Prioritizing ESG principles is crucial for the long-term success of any organization. Corporations must instill these values in their employees and make sustainability a core of their company culture to create a more just and equitable world.
References
Business & Human Rights Resource Centre. (n.d.). [PDF] full report: “The Materiality of Social, Environmental and Corporate Governance Issues to Equity Pricing: 11 Sector Studies by Brokerage House Analysts at the Request of the UNEP Finance Initiative Asset Management Working Group.” Retrieved from https://www.business-humanrights.org/en/latest-news/pdf-full-report-the-materiality-of-social-environmental-and-corporate-governance-issues-to-equity-pricing-11-sector-studies-by-brokerage-house-analysts-at-the-request-of-the-unep-finance-initiative-asset-management-working-group/ResearchGate. (2023, January 19). Universal Owners and ESG: Leaving Money on the Table?
Retrieved from https://www.researchgate.net/publication/4989166_Universal_Owners_and_ESG_Leaving_Money_on_the_TableSmith School of Enterprise and the Environment. (n.d.). Sustainable Finance and Transmission Mechanisms to the Real Economy. Retrieved from https://www.smithschool.ox.ac.uk/sites/default/files/2022-04/Sustainable-Finance-and-Transmission-Mechanisms-to-the-Real-Economy.pdfUnited Nations Environment Programme Finance Initiative (UNEP FI). (n.d.). [PDF] The Materiality of Social, Environmental, and Corporate Governance Issues to Equity Pricing.
Retrieved from https://www.unepfi.org/fileadmin/documents/amwg_materiality_equity_pricing_report_2004.pdfYumpu. (2014, April 14). The Materiality of Social, Environmental and Corporate Governance. Retrieved from https://www.yumpu.com/en/document/view/24456743/the-materiality-of-social-environmental-and-corporate-governanceISSB website. (n.d.). Retrieved from https://www.issb.org/IFRS Foundation website. (n.d.). Retrieved from https://www.ifrs.org/Taskforce on Climate-related Financial Disclosures (TCFD) website. (n.d.). Retrieved from https://www.fsb-tcfd.org/Sustainability Accounting Standards Board (SASB) website. (n.d.). Retrieved from https://www.sasb.org/International Integrated Reporting Council (IIRC) website. (n.d.). Retrieved from https://integratedreporting.org/
Author Profile
Dr. Mythili Kolluru is an experienced Assistant Professor in the Undergraduate Studies Department at the College of Banking and Financial Studies in Oman. She specializes in Strategic Management, Organizational Studies, and International Business, with a doctorate in Strategic Management. Dr. Kolluru is a certified Strategic Planning Professional and Chief Strategy Officer of FunkeyB, a London-based Management Consultancy firm. Dr. Kolluru’s research publish in several top-ranked journals; she is an author with several copyrights.
Contact her at professormythili@gmail.com