Published on November 9, 2023, 2:52 am

The role of Environmental, Social, and Governance (ESG) initiatives in business has become increasingly crucial. A recent report by Infosys titled “ESG Redefined: From Compliance to Value Creation” reinforces this point, highlighting the financial returns that executives have experienced by investing in ESG.

According to the report, up to 66% of executives surveyed reported moderate or significant financial returns within three years of implementing ESG strategies. This indicates a clear link between ESG and profit growth. However, the report also acknowledges that budget constraints may present obstacles for companies looking to invest in ESG measures during the current economic climate.

Infosys President, Mohit Joshi, emphasizes that spending money is necessary to generate profits. He asserts that while it’s not a novel concept, it remains essential for companies aiming to achieve their ESG goals and sustain profitable growth.

To harness ESG’s true potential and maximize its financial benefits, companies need to align their strategies and execute them effectively. By doing so, businesses can accelerate their ESG initiatives and reap greater rewards.

The Infosys report offers several suggestions for accelerating the financial rewards associated with ESG:

1. Recognize ESG as a moneymaker: The report reveals that increasing ESG spending by 10 percentage points correlates with a 1-percentage-point increase in profit growth. For example, if a company currently allocates 5% of its budget to ESG initiatives and increases that portion to 15%, it can expect a one percentage point increase in profits.

2. Don’t overlook the “S” and “G” in ESG: Many companies tend to focus predominantly on the environmental aspects of ESG, such as carbon neutrality and reducing emissions. However, there are also opportunities for improving profitability through social and governance initiatives. Research shows that social factors like board diversity have a positive correlation with profitability.

3. Embrace an ESG leadership strategy: Companies that demonstrate leadership in ESG often experience a 2-percentage-point increase in profit and revenue growth. This can be achieved by establishing roles such as a Chief Diversity Officer (CDO), Chief Sustainability Officer (CSO), and an ESG committee on the board. Additionally, when the CSO has authority over capital expenditures for ESG initiatives, it further enhances financial performance.

However, the report indicates that only 27% of companies surveyed have all these components in place. The C-suite and top executive ranks are particularly lacking attention when it comes to implementing ESG changes. Just 19% of respondents report linking executive compensation to ESG goals, while only 30% say their organizations hold the C-suite responsible for ESG.

4. Prioritize supply chain transparency: The research underscores the importance of aligning ESG goals with the supply chain. As more companies are expected to track their scope 3 greenhouse gas emissions, transparency becomes critical. Unfortunately, less than one-third of companies currently share ESG expectations or requirements with their suppliers. Furthermore, only 16% renegotiate contracts based on ESG data from supply chain partners. There is a clear need for enhanced leadership within the supply chain and incentives for sharing ESG data.

The findings of the Infosys report provide valuable insights into bridging the gap between strategy and execution in the realm of ESG. By recognizing its potential as a value creator and prioritizing budget allocation to relevant initiatives, companies can achieve robust financial returns while contributing to a more sustainable world.

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