ESG and the Growth Imperative - For Indian companies

The Environmental, Social, and Governance (ESG) agenda has become a crucial item to consider, one that businesses across sectors cannot afford to overlook. Even as business leaders have set out on the path to achieve their net zero goals and building trust in the market, it is important to examine the long-term perspective on ESG investments.

As per KPMG in India’s 2024 India CEO Outlook, CEOs in India and across the world are taking a long-term view on ESG investments, with many expecting significant returns within five to ten years. Focusing on the environment and creating positive social impact can allow organisations to meet stakeholder expectations while securing a competitive edge in the marketplace.

The global economy rests on energy intensive transportation of goods, materials and metals, high intensity manufacturing and carbon intensive agriculture. This system is part of complex global supply chains that can’t really be turned around quickly, as they have been created over decades. Hence, CEOs in India and across the world face the daunting challenge of creating low emission targets, aligning processes, supply chains and people without systemic reform. Moving to net zero is also capital intensive and in many cases, securing financing can be difficult. Further, timelines for sustainability goals may often exceed current leadership tenures.

When these challenges are examined against the threat of AI, a bigger set of issues emerge. AI and ESG intersect to possibly emerge as the biggest disruption to business ever seen, emphasising the need for operational and business model changes. 16 per cent CEOs in India (in comparison to 10 per cent of CEOs in India in 2023) and 14 per cent CEOs globally consider operational issues as the greatest threat to their organisations' growth.

Improving cost competitiveness with sustainability

Companies that reduce costs and emissions simultaneously can gain market share and finance further sustainability efforts through the additional cash generated. Take the case of the Metals and Mining industry for example. Given the massive quantity of supply of raw materials required for energy transition and the carbon intensity of metals, companies in this sector would need to find ways of growing, while keeping their emissions to a minimum.

Therefore, metals and mining companies today need to look at operational transformation for emission reduction. They should look at integrating ESG into their corporate strategy itself, as this can help in reducing operating costs. Apart from this, other benefits could include efficiency, waste reduction and the rationalisation of materials. Add to this- social initiatives and metals and mining companies could make a huge difference by supporting local communities and generating a positive social impact, thereby allowing themselves the social license to operate.

Finding opportunities in adjacencies and new pools of value

Closer examination of most net zero trajectories highlights that business as usual won’t get most companies anywhere near net zero. New products and services need to be created and new markets examined. To this effect, automotive companies could look at reducing the use of virgin materials and focusing on modular designs, to allow reuse and recycling of parts. Additionally, they could also look at setting up a franchise model to set up high efficiency vehicle scrapping facilities.

Companies that are quick to offer low or zero carbon products, can create value through addressing market gaps and price premiums. Infrastructure companies for example, can look at innovating to create green steel – i.e create steel through processes that are significantly lower in carbon emissions.

Food companies on the other hand should look at strongly embedding green / organic / natural positioning and related pricing premiums in their customer value propositions itself. These green products can then be targeted at new markets, new customer segments and many times by establishing new supply chains that allow for tracking and tracing of materials. As a result of this, food companies can look at building green businesses having an opportunity to secure early demand for greener, lower carbon product offerings, thereby benefitting from green financing.

Reaping rewards and building reputation

CEOs should also start considering ESG as an integral part of their corporate strategy, particularly in the context of enhancing customer relationships and bolstering brand reputation. 30 percent of CEOs in India compared to 34 per cent globally have cited building customer relationships and positive brand association as the top area, where ESG would have the most impact, followed by shaping capital allocation, partnerships, alliances, and M&A strategy, and attracting next generation of talent.

Further, it is evident that leaders are prepared to undertake measures in response to ESG concerns. A significant majority, 66 percent of CEOs in India compared to 76 percent CEOs globally, have indicated they would be willing to divest a profitable part of the business that was damaging their reputation.

Data, Tech and ESG form the cornerstones of new business strategy

Data from the study mentioned in this article shows that the confidence of CEOs in India in terms of growth prospects for the global economy over the next three years has increased to 80 per cent in 2024 from 69 per cent in 2023. This substantial increase highlights a renewed optimism and determination in navigating long-term growth trajectories.

To succeed and create value through sustainability, CEOs in India should evaluate their business strategies and keep themselves informed about market opportunities and policies so as to make timely decisions to transition towards green products and services. This involves building ESG dashboards that integrate into ERP systems.

ESG, is no longer extraneous, it’s now an integral part of decision making as companies today have access to technology to forecast business results, carbon emissions, wider environmental impacts and business risks.

Below are seven tipping points that will accelerate the ESG transition in India

games

The government’s focus on the Viksit Bharat or developed India program that focuses on Climate Resilient Development is a big initiative. Energy transition is an important focus in making this work.

filter_tilt_shift

The consistent regulatory focus on scaling up sustainable finance will also be key- The Reserve Bank of India has drafted the climate finance taxonomy and the draft guidelines for climate risk and opportunities assessment for banks This represents a significant milestone in India’s journey towards climate resilience in the financial sector.

fact_check

The Governments focus on jobs and skills is accelerating. Green Skills for a Green India are seen as an accelerator.

workspaces

Consumer choices are moving towards sustainable products. The government has also constituted the greenwashing guidelines, making it imperative for brands to prove their claims.

gps_fixed

Just as the way India is the largest digital payments hub, technology at scale to enhance a sustainability first economy is in the works and is a big positive.

device_hub

The Niti Aayog (the central planning body) has already initiated several committees to double down on the right sustainability strategy for the country and integrate it into different ministries. Focus on the blue economy, reduction of waste, accelerating sustainable innovation are some of them.

auto_mode

Green supply chains to boost India's global competitiveness and build competitive advantage are yet another focus.

Governance (ESG) factors. What was once considered an optional set of ethical considerations has now become an imperative for companies worldwide. This paradigm shift is not merely a trend but a global movement that has gained remarkable momentum. For Indian companies, the compelling reasons to expedite their journey towards ESG readiness today are abundant and undeniable.

This article was published in ET Online on Jan 18, 2025.