Firms Need to Welcome Green Debates, Not Sidestep Them

Neglecting ESG can lead to a loss of market share to competitors who embrace eco-friendly practices or are viewed as more socially responsible. Overall, companies with robust ESG practices displayed a lower cost of capital, lower volatility and fewer instances of bribery, corruption and fraud. However, challenges remain.

Spectre of Greenwashing

Globally, the trend of greenwashing has sparked increasing concern among regulators and consumers alike. A notable example is the Volkswagen emissions scandal, which brought to light how companies could mislead consumers by falsely claiming environmental benefits.

SEBI is implementing the BRSR framework, which mandates ESG disclosures for the top 1,000 listed companies in India, thereby positioning Indian companies to succeed in a global market that values sustainability.

More recently, the Central Consumer Protection Authority (CCPA) published guidelines titled Guidelines for Prevention and Regulation of Greenwashing or Misleading Environmental Claims, 2024 to prevent greenwashing and ensure the integrity of advertisements related to sustainability.

Data Challenges

While various organisations and frameworks offer guidelines for ESG reporting, the absence of a universally accepted standard makes it challenging for investors and stakeholders to accurately compare data.

Along these lines, Nasdaq’s Sustainable Lens, a new AI-powered SaaS platform, aims to help companies and investors navigate and utilise ESG data from thousands of companies. In India, IBM has added AI-powered emissions planning and forecasting capabilities to its ESG data collection, analysis and reporting platform—IBM Envizi. Investing in automation, AI for data gaps and third-party audits enhances ESG data quality.

Cost Versus Returns Debate

According to studies, consumers are willing to pay a premium of up to 27.6% more for “sustainable” products over others. ESG initiatives help companies create long-term value with consumers and stakeholders, which, over time, yields other benefits such as stakeholder loyalty, economic efficiencies, and opportunities for innovation.

Younger customers, in particular, are more inclined towards sustainable and socially responsible businesses. Also, ESG-compliant companies have less risk of regulatory penalties, thus lowering compliance costs in the long run. Moreover, a company’s sustainability efforts promote employee satisfaction and retention: 35% of UK office workers in a survey said they were willing to quit their jobs because of their employers’ weak climate action.

Between 2013 and 2020, companies that consistently scored high on ESG factors saw 2.6 times greater shareholder returns and enjoyed 4.7 times higher operating margins than average scorers. Also, recent evidence links higher ESG scores to a 10% lower cost of capital.

Measuring Success

ESG metrics offer a holistic view of sustainability, ethics and risk. Companies assess ESG through risks from poor performance and opportunities from proactive initiatives. Over 95% of S&P 500 firms publish sustainability reports. In India, SEBI mandates the top 1,000 listed companies to submit BRSR, voluntarily in the financial year 2022 and mandatorily from financial year 2023.

Companies with strong ESG performance exhibit higher returns, firm value and profitability and outperform in the mid- and long-term. They also recover faster from financial downturns, reduce operational risks and maintain strong risk-adjusted performance.

Further, sustainability-focused investment indices outperform traditional markets, as shown by the Financial Times Stock Exchange (FTSE) Opportunities All Share Index, which outperformed the FTSE Global All Cap Index by 4.9% annually between 2015 and 2020. Alongside this, ESG commitment strengthens investor confidence and capital access.

A recent SAP Sustainability Survey found that 77% of Indian businesses reported sustainability strategies contributing to financial growth, while 39% plan to increase investment in sustainability within the next three years. Firms emphasising ESG saw revenue grow by 9.7% versus 4.5% for others, while ESG-focused businesses reported an average 9.1% profit increase, with the US leading at 11%.

More Than Money

There are several financial benefits to integrating ESG with business strategy. The first is reduced carbon emissions. Companies reducing emissions and adopting energy-efficient technologies are less vulnerable to regulations.

Diversity, equity and inclusion (DEI) initiatives enhance sustainability and success. Supplier diversity reduces carbon footprints, while employee resource groups boost job satisfaction and retention. Microsoft’s ESG scores reflect its DEI efforts—by 2020, women comprised 28.6% of its global workforce, and racial and ethnic minorities made up 41.3% of its US workforce.

Moreover, disclosing ESG performance builds trust with customers and employees and enhances a company’s reputation while supporting equitable societies and fair labour practices.

ESG also makes workplaces appealing to employees who value social responsibility, as demonstrated by a multinational food-products corporation, which prioritised employees and used ESG data to assess workplace conditions, employee satisfaction and health programmes. Similarly, Nestlé’s Water Resources Reviews led to a nearly 50% reduction in water use between 2010 and 2020.

Companies can use AI-driven analytics to boost efficiencies across the ESG value chain, including performance tracking, data collection, key performance indicator monitoring and real-time ESG insights. Elsewhere, companies must engage employees, consumers and investors in their ESG work to foster innovation and internal accountability.

Companies must also track ESG progress through structured internal reviews, external reporting tools and third-party audits. Participating in initiatives like the UN Global Compact provides access to best practices and strengthens ESG credibility.