A new report by Infosys Knowledge Institute, ESG Redefined: From Compliance to Value Creation suggests Environmental, social, and governance issues investment correlates with higher profits. The report highlights the actions companies should take to achieve ESG goals and generate financial returns across sustainability initiatives.
The report reveals 90% of executives said ESG spending led to moderate or significant financial returns. Most respondents (66%) experienced ESG returns within three years. The report acknowledges that despite ESG’s clear link to profit growth, budgets can be an obstacle in the current economy. This is worrisome, as companies need financial resources and operating model changes to achieve ESG goals and sustain profit growth.
Key report insights
Strategy alignment and execution will allow businesses to accelerate their ESG initiatives with greater payoff. The Infosys Knowledge Institute revealed several insights to guide companies to accelerate ESG’s financial rewards:
- ESG is a proven moneymaker. The report found that a 10% point increase in ESG spending correlates with a 1% point increase in profit growth. A company that currently spends 5% of its budget on ESG can expect a 1% point profit increase if it aligns operating or capital budget to increase ESG spending portion to 15 percent.
- Overlooking the ‘S’ and ‘G’ in ESG reduces profitability. Many companies focus ESG efforts on the environmental segment. This includes commitments to carbon neutrality, net zero, and reducing greenhouse gas emissions. However, there are also opportunities to improve financial results through social and governance initiatives. Research data shows social initiatives like board diversity correlate to improved profitability.
- ESG leadership strategy correlates with a 2% point increase in profit and revenue growth. Companies perform better financially when they demonstrate all the following:
• a chief diversity officer (CDO)
• chief sustainability officer (CSO)
• ESG committee on the board
• furthermore, when the CSO clears capital expenditures for ESG initiatives.
However, only about a quarter (27%) of those surveyed say their company has all four components in place. The survey data analysis also found the C-suite and top executive ranks were the most neglected areas for ESG changes. Only 19% of respondents say their company ties executive compensation to ESG goals. 30% say their firms place responsibility for ESG with the C-suite.
Supply chain transparency matters.
The research found that almost all companies are interested in aligning their ESG goals with their supply chain. Especially as more companies are expected to account for their scope 3 greenhouse gas emissions. However, less than one-third share ESG expectations or requirements for suppliers. Only 16% say they renegotiate contracts based on ESG data from those in the supply chain. This indicates a clear need for more leadership in the supply chain and incentives to share ESG data. Whether it’s meeting new contract requirements or making themselves more appealing to others in the supply chain.
Methodology
Infosys used an anonymous format to conduct an online survey of 2,500 business executives. The study covered industries across the US, UK, France, Germany, the Nordics, Australia, New Zealand, China, and India. To gain additional qualitative insights, the researchers interviewed subject matter experts and business leaders.
Infosys President Mohit Joshi said, “There is nothing novel about the idea of spending money to make money. However, many companies are not applying that strategy to ESG as they do for other parts of their business. Companies must shift views to recognise ESG as a value creator to reap the financial benefits of ESG investments. Furthermore, to achieve maximum impact in creating a better, more sustainable world.”
Enterprise Times: What this means for business.
ESG goals are no longer nice to have. They are business necessities. Environmental, social, and governance issues have become more important now than ever. Report after report has indicated high levels of consumer concerns for issues around the environment, sustainability and the climate. However, it’s getting harder for companies to stand out from the crowd when it comes to corporate responsibility. Businesses that promote their ESG credentials inadvertently put more pressure on their peers to do the same. This can create a conveyor belt of well-trotted-out but meaningless goals.
ESG starts as a differentiator for many firms and then turns into an expectation the ceiling becomes the floor. The emphasis on various ESG priorities increased dramatically during the pandemic as social issues moved to the forefront and the world saw how slowing economic activity reduced greenhouse gas emissions. At the same time, ESG investments increased as the global economy struggled.
The Infosys report suggests the value of ESG investment assets is projected to reach $53 trillion by 2025. One-third of global assets under management. As a result, enterprises must get serious with commitment to achieving their ESG goals and aspirations. Business needs to find new ESG strategies to differentiate themselves from their competitors, as George Serafeim of Harvard and Ioannis Ioannou of the London Business School determined when they analysed 2,000 companies globally. Their findings were that ESG practices “converged” from 2012 to 2019. Infosys’s new report clearly argues that high-performing companies should view ESG as a value creator for enterprises. The bonus will be creating a better, more sustainable world.
