The Need for ESG and Its Impact on Businesses

According to a report by the World Economic Forum, in 2021, the world’s largest iceberg (A68) completely melted. Scientists claimed that it would take a decade to melt completely, but it took less than four years. The iceberg released 1.5 billion tonnes of fresh water each day, altering ocean currents and disrupting ocean ecosystems. Experts suggest that with the melt rate accelerating as the planet warms, we need to halve emissions by 2030. This is a clear indication that organisations, leaders and people in general need to revisit and think about how what they do impacts the very environment and society we live in. The focus on sustainability was solidified by the Paris Agreement, first signed in December 2015, wherein 195 nations committed to reducing harmful emissions. 

With natural resources depleting, human values have been tested and pushed to the limits. Innovation and new-age technology are changing our everyday lives faster than ever before. There’s a growing ask within organisations about why they need to adopt environmental, social and governance (ESG) factors and the impact ESG will have on them and society.

What is ESG? 

ESG can be defined as evaluating a firm’s collective consciousness for social and environmental factors. It is a large part of the corporate social responsibility (CSR) framework upon which corporates, shareholders, regulators and customers are increasingly focused today.

The environmental criteria may include a firm’s energy optimisation, waste disposal, pollution, natural resource conservation and more, depending on what is relevant for the business’s footprint. The social criteria highlight the community improvement initiatives taken by the company. The governance criterion is the internal system of practices, controls and procedures adopted by the company to govern itself, make effective decisions, comply with the law and meet the needs of external stakeholders.

Why is ESG important? 

Deloitte Global surveyed 350 executives to understand their companies’ sustainability efforts. Results showed that 59% of companies are seeing revenue growth, and 51% are seeing an increase in profitability. Beyond positive financial growth, results showed 37% are seeing a measurable impact on the environment, and 38% are seeing a boost in employee morale.

Big organisations are now pledging their commitment to ESG and investing heavily in their business growth. For example, Philips’ ESG framework comprises a comprehensive set of commitments across ESG factors that guide the company’s execution strategy. Similarly, Reckitt has been highly active in pursuing its sustainability goal for a cleaner and healthier world.

The growing importance of ESG is supported by the fact that investors and other stakeholders are calling on public and private companies to disclose more about their sustainability strategies. With ESG coming to the forefront, organisations are also giving particular emphasis on hiring ESG-focused professionals to drive organisational ESG goals. 

ESG is undoubtedly crucial for organisations in the current business landscape. However, it can have different connotations for businesses owing to their footprint and priorities. Although there are many things that businesses can do internally as part of their ESG initiative, they also need the support of their supply chain. This interdependence has made devising a joint strategy with the supply chain to achieve their ESG goals imperative for leading organisations. 

Current scope of ESG in India

In step with the world, India, too, is witnessing an increasing focus on ESG. As per a report released by NASSCOM and Boston Consulting Group, assets under management (AUM) for ESG-themed funds increased 2.5 times from USD $275 million in FY20 to USD $650 million in FY21. In addition, the issuance of sustainability-linked bonds in the first four months of 2021 was more than double the issuances in all of 2020.

The Securities and Exchange Board of India (SEBI) recently issued a circular implementing a new sustainability-related reporting requirement for the top 1,000 listed companies by market capitalisation.  The new disclosure will be made in the Business Responsibility and Sustainability Report (BRSR) format. Under this, BRSR reporting will become mandatory from the financial year 2022-23 for the top 1,000 listed companies.

Only a select few large enterprises have comprehensive policies, strategy, execution and audit focus on maximising ESG impact. Other large, medium and smaller organisations are waking up to the realities of ESG like climate change, carbon emissions, developing safer communities and forced labour, among others, only now. ESG is still not being adopted in its entirety because many organisations are focused on meeting their short-term priorities, making them unable to focus on long-term priorities like ESG.

Bridging the gaps to enhance ESG goal realisation

While there is no single strategy around ESG that can cater to businesses of all sizes, and as organisations are contemplating their dependencies, internal as well as on the supply chain, here are a few ideas that could potentially help organisations move closer to their ESG goals, improve their existing strategy and future-proof their business. 

• The supply chain plays a significant role in enabling many organisations’ end products and services. Therefore, organisations will be better positioned to meet their goals when their  supply chain partners adhere to ESG norms and processes.
• Typically, suppliers are audited based on their performance against specific ESG goals. Complementing an audit with a ‘carrot’ approach will incentivise suppliers to perform better. Suppliers also need to realise the reasons for these audits and work in collaboration with the buyers in a way that is incentivising for all parties involved, therefore maintaining transparency.
• Embedding sustainability factors into popular supply chain finance (SCF) solutions can provide tangible financial incentives to qualified suppliers, which can be done at scale, easing program management. SCF can evolve and incorporate ESG criteria into the funding process. 

What can C2FO do to help businesses in their ESG initiatives?

C2FO believes that a fair and inclusive financial world will influence a positive change on the most pressing economic, environmental and social challenges. In partnership with C2FO, organisations have an opportunity to enhance their success towards their ESG efforts by providing suppliers, including micro, small and medium enterprises (MSMEs), with convenient access to cost-effective working capital and liquidity. This functions as an incentive for them to adopt and maximise their efforts towards ESG and other sustainable practices. 

In addition, C2FO’s unique platform can understand business needs and strategy and create incentive solutions for the supply chain, which can complement the existing ESG audits and other business control mechanisms. If this is well leveraged, it can help businesses achieve their sustainable sourcing goals, increase the security of the supply chain, and improve relationships and trust with the suppliers. The platform can also leverage the extensive network of more than 1.9 million suppliers, combined with the data intelligence gathered to streamline ESG processes and identify qualified suppliers. The C2FO platform can also track all suppliers that are rated by different agencies, thereby helping buyers to create focused markets to differentiate incentives to the suppliers.

Conclusion

In this global phase of transformation, combined with volatility and uncertainty for the businesses, the ESG framework provides businesses with long-term value by holistically safeguarding profits, people and the planet. Therefore, embedding ESG factors into business becomes necessary as ESG goes beyond corporate responsibilities and focuses on holistic material issues to build resilience in the short, medium and long term.

Creating long-term value for businesses goes much beyond mere financial profit and loss, and organisations need to look at the larger picture. Businesses in Europe and the United States are way ahead in planning their ESG goals since their business sustenance is much more stable. In sharp contrast, Indian businesses have a long way to go in adopting and implementing ESG goals, along with immediate solutions for their short- and medium-term priorities.

The sustainable early payment program offered by C2FO can help businesses solve their here-and-now requirements to meet supply chain needs. In addition, C2FO enables unique working capital and liquidity solutions to ensure organisations can enhance their ESG focus and drive positive long-term outcomes.

To know more, please contact us at +91 7035 7035 93 or email our team at [email protected]