ESG refers to Environmental, Social and Governance. Parameters relating to ESG are used by investors to evaluate companies in which they want to invest, or continue staying invested. ESG includes a set of non-financial parameters which aim at measuring the sustainability of a company. ESG has gained a lot of importance in the last decade, and more recently during the COVID-19 pandemic. It has led investors to believe that companies that are focused on ESG, and have a strong ESG score, are less risky, and are better prepared for uncertainty. Further, such companies focus on sustainability.
The last decade saw “Environmental aspects” of ESG being discussed extensively. This included issues such as global warming, climate change, recyclability and water scarcity.
Parallelly, there was increased focus on “Governance aspects”, with Boards, committees, shareholder activism, general meetings and the like being constantly spoken about. The world over, there have been several amendments to laws, regulations and Codes to Corporate Governance, to show an enhanced focus on Governance.
With the pandemic, in the last 2 years or so, attention has also shifted to “Social aspects”, with the focus now steadfastly on stakeholders of a company. There is focus on stakeholder interest, and stakeholder democracy. No longer is it considered sufficient for a company to only look at shareholders and investors. Social aspects include a company’s practices in relation to human rights, labour, employees, diversity and inclusion. The pandemic has led companies and their investors to ensure that companies are conscious of the impact of their actions on all stakeholders, especially on their employees and society.
With the advent of COVID-19, there was a focus on employee welfare, employee friendly policies and practices, focus on labour, and focus on society. Employees became centerstage. Sustainability of companies became significant, and with that all aspects of ESG became important. The pandemic exposed several unforeseen risks, including those related to ESG. Managing ESG related risks, helped companies to survive. These included risks in relation to health and safety of workforce, risks in relation to water and climate, and risks in relation to compliance and culture.
As an immediate response to the pandemic, it was expected that many companies, facing existential crisis, would focus on survival, and away from ESG issues. However, the opposite happened in good companies. Many companies focused on stakeholders. They followed the philosophy of stakeholder capitalism, and went beyond focusing and providing only monetary returns to shareholders. Many companies who treated their employees and other stakeholders well, also engaged with customers and society at large. This helped their reputation too.
The pandemic also saw a surge in creation of, and investment in, ESG themed funds/ social impact themed funds. Investors were ready to pay a premium for companies which had an acceptable philosophy relating to ESG, and were willing to walk the talk.
With more focus on ESG, there has been an increase in demand for ESG related disclosures. Most big companies are now providing some kind of reports on ESG and/or Sustainability Report.
Some of the trends in ESG in post-Covid-19 are:
- An integrated ESG strategy: A number of companies have an ESG strategy, with many more adopting one. Factors impacting on ESG are increasingly a part of the core values of the company.
- E, S, and G – all will be important: The ESG strategy of companies will have to give importance to all E, S and G factors.
- Renewed efforts on environmental factors: The pandemic will renew the efforts of companies towards the environmental and climate change agenda. It will drive the companies to switch to products and services that promote and reward sustainable values.
- Addition to risk register: Although some elements of ESG related risks were crucial in the pre-Covid era, the pandemic has broadened the dimensions of ESG related risks. Further, companies will have to assess the impact of ESG related risks on financial risk, operational risk, reputational risk and the like.
- Policies of the company: COVID-19 has sharpened the focus on employee-centric policies, as well as focus on their health.
Several studies conducted on ESG show that companies have started putting in place measurable targets towards attaining their ESG goals, with several other companies stating that they are moving in the direction of setting up similar goals.
As businesses gear up for a post-pandemic world, there is an emphasis on sustainability as being central to decision-making. The COVID-19 pandemic has shown that risks can be abrupt, unforeseen, long-term and can possibly disrupt businesses. However, the businesses that are more resilient and sustainable are able to manage them before they cause both revenue or reputational losses.
Shikha Shah