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Sustainable businesses: How companies should decide on their ESG targets

Sustainable businesses: How companies should decide on their ESG targets

As per the Business & Sustainable Development Commission, sustainable business models related to the SDGs could open economic opportunities worth up to $12 trillion and increase employment by up to 380 million jobs by 2030

Sustainability should be considered as a way of life that enables long-term goodness and growth Sustainability should be considered as a way of life that enables long-term goodness and growth

It is halfway into 2021 - the second year into the COVID-19 pandemic and its effects are far from receding. Our priorities and approach towards holistic development have been put under a scanner. The pandemic has, in fact, made us more conscious of the merits of using sustainability as a tool to shape a better future.

As we plan a comeback with a strategically viable pandemic response, organisations, think tanks, and governing forces must align to craft measures that not only promote early economic recovery but also consider the long-term objectives for sustainable and equitable growth for a resilient society, which is only possible through a re-adjustment of strategies. 

Also Read: IT, financial firms most ESG compliant; Infosys scores highest in CRISIL rankings

For an organisation, this involves incorporating a strategy for sustainable investing, which can help build a stable and growth-oriented business, by focusing on the key factors - Environmental, Social, and Corporate Governance (ESG). Each of these factors has a material impact on long-term risk and return for the organisation, society, and environment.

Sustainable practices by an organisation also attract more customers, allow better access to resources, reduce operational costs, improve operational efficiency, and they also ensure reduced risk of regulatory and legal interventions, leading to greater social credibility, increased talent attraction, enhanced employee morale, and stronger community relations.

Let's take a look at how a wider focus on ESG metrics can create sustainable value.

Restoring Environment with Green Tech Investments

I believe that 'Green-tech' - the use of technology to create products that are more environmentally friendly - can be one of the biggest opportunities, that offers a framework to generate economic growth, achieve social and environmental justice, and strengthen governance. 

Ecological restoration - the process of assisting the recovery of an ecosystem that has been degraded, damaged, or destroyed due to repeated human intervention - is the need of the hour. 

Integrating metrics for waste management, Greenhouse Gas (GHG) emissions, indirect emissions from activities, along the value chain and company management processes, to the performance scorecard, and improving these metrics using Green-Tech, not only results in process optimisation, but also significantly improves the restoration of the environment.

For instance, organisations that set a target for renewable energy mix and work towards it through measures such as solar farm installation, use of energy-efficient equipment like motion sensors, and LEDs can significantly save energy sources such as water and electricity and reduce GHG emissions, thereby playing a role in restoring the ecosystem, while simultaneously reducing their costs. 

Innovative use of emerging technologies can be a game-changer in protecting the environment. For instance, IoT (Internet of Things) can play a major role in reducing energy consumption, improving air quality, and reducing CO2 emission through smart energy meters and sustainable transportation. 

Blockchain is another digital technology that can help ensure supply chain transparency and efficiency through features such as 'smart contracts' and enable paperless transactions as well.

About 20% of the world's energy is being employed for computation. The use of GPUs (Graphical processing units) to boost AI algorithm training consumes a lot of energy making them a power hog. 

The shift to quantum computing can play a significant role in addressing this, as the principles of quantum computing make it scale exponentially, enabling it to solve large problems with just a fraction of the power that today's supercomputers use.

Also Read: HCL tops among NSE 100 companies in best environment, social & governance policies

Responsible Investments in Assets Leads to Higher Valuation

With great power comes great responsibility; as growth agents, businesses need to invest responsibly in assets that will help build a promising future.

Responsible investments by businesses through the allocation of capital on sustainable equipment and other assets, to ensure long-term "good" and avoid investments that may cause harm to the environment, society, or corporate governance in the long term, can result in a strong ESG proposition and thereby result in a higher ESG rating.

A study by McKinsey found that a strong ESG proposition correlates with higher equity returns; a focus on sustainable practices helps improve operational efficiency and enable higher cost reductions (about 5-10%), while also fostering investment and asset optimisation, all of which can lead to a higher valuation for organisations with high ESG rating.

The subsequent effect of this is evident from the fact that though the pandemic resulted in a huge blow to the overall economy, it is also presenting a unique opportunity to build a more resilient and sustainable economy as ESG funds continue to outperform other investments. 

According to Morningstar -a leading financial publication, in the first half of this year, net inflows into ESG funds in the US reached $21 billion, nearly equaling the total amount for the entirety of last year (which was a record - four times the previous record for a calendar year).

Risk Preparedness with a Strong ESG proposition

The triple bottom line factors - People, Planet, and Profits (3Ps) - are increasingly becoming an area of focus worldwide. Organisations are also making concerted efforts to align their strategies and sustainability efforts to best prepare for any future black swan events.

Investments in green tech can play a great role in preparing for environmental risks. According to the World Bank, post the financial crisis of 2008, 15 per cent of the global stimulus funding went into developing and deploying green technologies, which in turn helped in creating low-carbon jobs addressing the risk of unemployment, which is an instance of how ESG helps in risk preparedness in society. 

This stimulated growth helped bring down the price of solar technology by nearly 90 per cent. Incorporating an ESG framework into business operations and processes with a proactive risk mitigation approach is necessary towards becoming strategically and operationally resilient. 

A strong ESG framework put in place can reduce the risk of adverse regulatory interventions. For instance, as per a McKinsey report, the profits at stake for the pharma and healthcare industries due to such regulatory impact are about 25 to 30 per cent.

Green Business - The way ahead for value creation

It is time we consciously support and incentivise green projects, recognise the spirit of 'eco entrepreneurship', get our people upskilled in green technologies and risk management and tie up the 3P (People, Planet, Profits) goals with their professional KPIs (Key Performance Indicators) to revive the economy and environment alike. 

The 17 Sustainable Development Goals set forth by the United Nations are indeed guiding lamps for organisations for value creation. As per the Business & Sustainable Development Commission, sustainable business models related to the SDGs could open economic opportunities worth up to $12 trillion and increase employment by up to 380 million jobs by 2030. Sustainability should be considered as a way of life that enables long-term goodness and growth.

(C P Gurnani, Managing Director and CEO, Tech Mahindra.)