Investors are increasingly looking for firms that meet environmental, social, and governance (ESG) requirements. ESG criteria are being used by a growing number of mutual funds, brokerage firms, and robo-advisors. ESG investing is a big topic these days, with experts and investors debating the value of ESG in the future.
ESG, diversity, and inclusion measures are becoming more popular among venture capitalists and angel investors as well, searching for these indications in possible startup investments. “People, planet, and profits” is the new slogan for investors, businesses, and everyone producing something today. And this is especially true for consumer brands that influence the entire value chain, and hence on people and the world. If you’re unfamiliar with the phrase, you might be wondering what it means; if that’s the case, this article will explain everything you need to know.
What is ESG?
Private equity, institutional, as well as retail investors have a vested interest in sustainability because of their investment mission. Investors searching past the subsequent nook ought to pick out long-term threats and possibilities to affect their capacity to keep and construct wealth for future generations. Their funding horizon spans many years instead of the quarterly cadence of company earnings. Investing in environmental, social, and governance (ESG) is essential at this point.
Investments in environmental, social, and governance (ESG) prioritize the best environmental, social, and governance (ESG) elements or results. ESG investing is frequently viewed as a way to invest “sustainably,” that is, with the environment, human well-being, and the economy in mind. It is based on the growing belief that environmental and social factors have an increasing impact on an organization’s financial success. Let’s start with the basics to understand why ESG is more crucial than ever for your company:
· Environmental factors, or the ‘E’ in ESG, include a company’s use of renewable energy sources, waste management program, how it addresses potential air or water pollution from its operations, deforestation issues (if applicable), and its attitude and actions regarding climate change.
· The ‘S,’ or Social criteria, examines how a company interacts with its community. Internal labor policies, as well as rules governing diversity and inclusion, are also discussed.
· Governance, abbreviated as ‘G,’ refers to how individuals run a company in executive suites on the upper floors. How well do the company’s senior management and board of directors protect the interests of its many stakeholders, including employees, suppliers, shareholders, angel investors, and customers? Is the company involved in the community in which it operates?
ESG investment, which has exploded in popularity in recent years, is based on a long-term emphasis on material risks and possibilities. Asset class coverage, data availability, benchmarking, thematic investment, and other platform aspects are still evolving.
Why is ESG more important than ever before for your company?
For decades, businesses have discussed pursuing interconnected goals that benefit people, the environment, and profits. Still, they have rarely found the opportunity or the willingness to put their words into action. The Companies Act of 2013 sparked a fire by making corporate social responsibility (CSR) a legal requirement, but it wasn’t enough.
All of that is about to change due to the SEBI’s revised sustainability reporting rules, including an ESG assessment. Of course, by FY2023, these standards will apply to the top 1,000 publicly traded firms based on market capitalization, and reporting will take the form of new business responsibility and sustainability report (BRSR). SEBI claims that this will improve both sustainability and financial reporting.
An increasing number of companies are introducing ESG’s complex and all-permeable benefits, such as attracting talent, addressing future consumers, promoting brand enhancement and innovation. In general, ESG prepares a company to be resilient in the present and future scenarios.
Climate change, energy transition, and rising inequality, to name a few of the world’s complex challenges, have compelled major incumbent corporations to act, reinventing their business models in some cases and dramatically re-engineering their goods, services, and operations in others. These steps are critical for ensuring a prosperous future. On the other hand, large corporations are incapable of doing so independently. These solutions must also include young, emerging startup backed by venture capital funds.
Venture capital funding in ESG focused startups is critical to any chance of addressing society’s most serious challenges. For VC funding companies, being the first to market as an ESG-focused VC fund may provide a competitive advantage. It will help attract high-quality portfolio startups ready to help address some of today’s most pressing issues, such as the climate crisis. To accomplish this, venture capitalists must improve their company selection and screening capabilities, reconsider their valuation methods, and rewrite term sheets to include ESG considerations.
Let’s look at some of its key aspects to discover why ESG is more crucial than ever:
1. Recruiting best players and increasing employee yield
Strong organizations with high ESG scores will attract top talent and retain employees for extended periods. Employees are proud of themselves when they have a clear environmental strategy. Younger generations desire to work for businesses that are more socially conscious. According to a Cone Communications survey on Millennial Employee Engagement conducted in 2016, 64 percent of Millennials consider a company’s social and environmental responsibilities when deciding where to work.
2. Cost reductions
The study discovered that companies with high ESG scores had lower capital, equity funds, and debt costs than those with low ESG scores. Companies that switch to more environmentally friendly manufacturing methods become more efficient and save money. Nestlé, for example, recently pledged a USD 2.1 billion investment by 2025 to transition from virgin plastic packaging to food-grade recycled plastics and the development of alternative sustainable packaging solutions. This measure will not only help it minimize its carbon impact, but it will also save money on non-compliance costs in many of the regions where it operates, which have stricter plastic packaging requirements.
3. Effective regulatory compliance and stakeholder management
All firms are influenced by one or more rules, depending on the markets they operate. Businesses that implement excellent ESG policies, especially governance, face less regulatory scrutiny and greater operational independence. They also face less pressure from environmental activists, labor unions, and other groups concerned about climate change. Consumers also prefer such brands. For example, in 2017, Starbucks launched the “Starbucks China Parent Care Program,” which provides health insurance to parents of over 10,000 Starbucks employees in China. Starbucks intended to expand in China, which was viewed as a strategic move given the escalating trade war between the US and China.
Why is ESG important to investors?
By thinking strategically about the ESG concerns that society, corporations, and governments face, institutional investors or angel investors can detect significant risks that may not appear on an issuer’s balance sheet today but grow large in the future. These threats are only one side of the story. Indeed, by focusing on environmental and social issues, investors can identify emerging companies to solve these issues and current companies that are responding favorably to ESG issues right now. These firms may have the best risk adjustment and return potential in the coming years.
The recent 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor survey demonstrates the growing importance of ESG issues to investors. According to the poll, 72 percent of the 98 percent of investors who examine ESG conduct a structured analysis of ESG performance, up from 32 percent in the previous survey two years ago. Furthermore, many people who use an informal style intend to switch to a more formal one (39 percent).
Institutional investors are rebalancing their portfolios to improve their environmental, social, and governance (ESG) performance. This step indicates a shift away from focusing on “responsible funds” and recognizing environmental, social, and governance (ESG) issues as critical to the success of all investments, be it angel investment, institutional investment, or any other investment.
Many countries have enacted regulations, such as carbon taxes. The financial and banking sectors have incorporated ESG principles into their funding criteria, so businesses already see the economic consequences of failing to act on sustainability. Stakeholders can only avoid bad lending conditions and capital market exclusion by demonstrating that they have implemented practical sustainability and ESG initiatives.
Furthermore, in startup world, the private equity market’s portfolio strategy incorporates sustainability and environmental, social, and governance (ESG) principles. Private investors have discovered that investing in companies with a solid and credible ESG strategy boosts ROI while lowering financing and revenue risks.
Investors are increasingly addressing ESG issues to help reduce investment risks. By reviewing a company’s ESG performance ratings and reports, investors can see how it manages risks and achieves long-term financial rewards. Investors can also use ESG criteria to avoid companies with higher financial risk due to environmental or other policies.
Businesses of all sizes must prioritize ESG for both short- and long-term gains, and they must constantly adapt to changing compliances and expectations from various stakeholders. Companies must stay current on how easy it is to access massive amounts of data and frameworks and how simple it is to implement ESG practices to save money and time. Its vast network of industry experts and advisors assists businesses in making difficult decisions and becoming more ESG compliant. Finally, companies should have timely information on their ESG performance to maintain positive investor relations.
Accelerating growth, cutting costs, improving effectiveness, attracting talent, and targeting tomorrow’s consumers, Millennials and Gen-Z, are all advantages, which is why ESG is more important than ever. ESG integration has been shown to benefit businesses and society, the environment, and humanity as a whole.