How ESG reporting fuels financial success – FinTech Futures

When organisations talk about environmental, social and governance (ESG), it’s a two-fold process: a detailed and transparent reporting of an organisation’s ESG initiatives and a systematic implementation of them.

An organisation with a robust ESG strategy is rated higher than its peers

But while many think it’s just a regulatory requirement, it’s so much more than just a compliance box-ticking exercise – it’s a sustainable business strategy. Building on ESG, some organisations have adopted the new ‘triple bottom line’ framework, which measures a business’s success in three key areas: profit, people and planet. Taking this approach, you can integrate sustainability into your core business strategy and decision-making and reap both tangible and intangible benefits. This is what differentiates a leading organisation from a follower.

The general goal of a sustainable business strategy is to positively impact the environment, society or both while also benefitting shareholders. Business leaders are increasingly realising the power of sustainable business strategies in not only addressing the world’s most pressing challenges but also driving their organisation’s success. However, defining what sustainability means, solidifying clear and attainable goals and formulating a strategy to achieve those goals can be daunting.

Thousands of research papers today acknowledge the fact that a focused management of ESG measures and programmes can significantly enable financial growth for your organisations through operational gains, improved performance metrics and better market sentiment. A Gartner study conducted in 2020 suggests that over 85% of investors consider ESG factors while building their investment portfolio. Banks also regularly screen the ESG risks before granting loans and the leading rating agencies such as S&P Global and MSCI critically scrutinise the ESG footprint of organisations, which has a significant impact on their stock price movement.

ESG disclosure has increasingly become a need for organisations to demonstrate that they are ‘ahead of the curve’ in every aspect of conducting business. As a result of which, more and more are adopting frameworks like the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), Task Force on Climate-Related Financial Disclosures (TCFD) and the Carbon Disclosure Project (CDP), which provide a fortified means to declare ESG reporting frequently and transparently to the world.

ESG initiatives power far-ranging value creation for organisations

ESG initiatives such as lowering carbon emissions, environmental risk management, improving the work conditions for your employees, focusing on diversity and inclusion and many more will also enable medium to long-term financial returns. NYU Stern has developed a Return on Sustainability Investment (ROSI) framework which correlates these sustainability strategies with the financial gains and helps in building a strong business case for any planned sustainability initiatives.

A sustainability-driven business strategy facilitates multiple financial gains. For example, sustainability protects an organisation during emergent situations, while initiatives focused on improving an organisation’s operational efficiencies not only reduce the carbon footprint of a process but also help in cutting down the input costs.

Furthermore, as Covid-19 accelerated the need for organisations to look beyond the office space, this led to a significant reduction in emissions and travel costs due to less office commuting and business travel. While organisations embark on the journey of establishing the circular supply chain processes for improving sustainability, reliability and availability, they are realising gains beyond just reducing cost. They are well on the way to being carbon neutral with more intelligent products, processes that are more intuitive and integrated and digital capabilities that make them industry leaders. A supply chain driven by ESG not only helps optimise costs, but also improves the customer sentiment about the products and services, which in turn leads to an increased top line.

Improve your chances of raising easy capital from markets

An organisation with a robust ESG strategy is rated higher than its peers. This improves its financing capacity and in turn, creates a cascading effect as they can get easier access to investments to expand their business further and grow further.

Reuters reported that in 2021, $649 billion was poured into ESG-focused funds accounting for nearly 10% of the worldwide fund assets. Investors like insurance companies, wealth managers, banks and asset managers consider it important to incorporate their environmental concerns into their selection of investments instead of simply considering the potential profitability.

ESG rating agencies put a lot of effort into incorporating various types of risks (excluding climate risk, physical risk, transition risk and geopolitical risk) during their risk assessment and rating processes. This matured and broadened risk analysis process helps these corporates gain trust by publishing the ratings in an ESG report, encouraging investors to go for a sustainable investment.

Digital intervention is key to unlocking value generated through sustainability

While accurate and consistent ESG reporting improves the credibility of an organisation, it is taking action which makes your business sustainable. This is easier said than done, as organisations globally are still struggling with reporting. But there are three ways in which digital intervention can help organisations generate value through adopting sustainability initiatives:

  1. Automated and integrated ESG reporting: The lack of a standardised ESG data collection process across a company’s operations and high reliance on spreadsheets and multiple reporting frameworks means the ESG reporting process can flow into 4-6 months for many organisations. The solution to reducing this timeframe would be to automate and integrate all these processes through one platform. This will provide real-time insights into the overall ESG footprint of the organisation to keep track of how they are progressing against their reduction initiatives.
  2. Adoption of digital technologies: Innovation holds the key to the entire ESG journey. IoT technologies can help bridge the data gaps and collect information from unchartered territories which can enable the process to be optimised. Embracing mobile solutions can reduce manual exposure to a hazardous work environment, which helps safety and costs.
  3. Connected platforms: Adoption of connected platforms can help give firms a detailed view of the supply chain and ensure the necessary checks are carried out. This also helps monitor the CSR investments organisations make and ensures the money flows into the hands of beneficiaries.

In conclusion, ESG management, fuelled by innovation, can generate a positive impact on an organisation’s financial performance. Leading organisations have realised it but followers need to change their mindset and develop a forward-looking ESG strategy.

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