How businesses shape corporate reputation and financial performance

ESG is not just a matter of compliance; it is a strategic imperative

With changing times, companies are becoming conscious of their ESG compliance. The measure emphasizes that firms operate responsibly and sustainably in matters of policy and practice. The importance of ESG gained further momentum in 2020 when the Reserve Bank of India (RBI) mandated Indian banks to disclose ESG information in their annual reports. Furthermore, in 2023, SEBI mandated the top 1,000 listed companies to follow Business Responsibility and Sustainability Reporting (BRSR). As of 2023, India ranks third globally in terms of greenhouse gas emissions, behind the United States of America, and China. Our emissions in 2021 totalled 3.9 billion metric tonnes of carbon dioxide equivalent (GtCO₂e), or roughly 7% of the world’s total emissions, according to Statista. The regulatory push from RBI reflects the growing recognition that ESG considerations are not merely optional but essential for financial institutions.

ESG Factors and Corporate Reputation: 

In light of evolving consumer expectations and worldwide business practices, ESG is essential for contemporary firms. It includes each of the three main performance measuring pillars comprising environment considerations, social responsibility, diversity, inclusivity, and good governance practices. Businesses now need to think about how their actions may affect society and the environment, in addition to their revenues and profits. ESG compliance enhances an organization’s reputation and financial performance by fostering confidence in its overall well-being and improving its prospects of attracting investments. The goal of organisations should be to measure non-financial risks and opportunities, with transparency playing a crucial role in ESG reporting. ESG factors are no longer a peripheral consideration but a fundamental element of modern business strategy.

ESG Factors and Financial Performance: 

Companies that adhere to ESG standards are better equipped to manage risks associated with climate change, labour practices, and ethical governance. Embracing sustainability not only aligns with ESG principles but also leads to cost reductions, effective risk mitigation, and operational efficiencies, positively impacting financial performance. Additionally, investors nationally and internationally (FDI) place a greater emphasis on ESG aspects. Companies with robust ESG compliance may enjoy improved access to capital and potentially lower capital costs, reflecting the growing recognition that responsible business practices contribute to long-term financial resilience and success.

Impact of supply chain challenges on corporate reputation and financial performance: 

A firm’s ESG adherence also depends on its supply chain’s roadmap for ESG compliance. These supply chains are complex due to the involvement of multiple parties, and they could be for different raw materials from different industry sectors. Any misstep by even one vendor can have cascading effects, affecting the overall reputation of the organisation and, inevitably, hampering its financial performance. By offering metrics and a roadmap for monitoring and controlling workforce diversity and carbon emissions, ESG gives corporates a framework for sustainable development. Along with human and labour rights, issues like environmental sustainability, transparency, and supply chain security have become critical.

An all-encompassing strategy for evaluating the escalating ESG risks: 

To effectively mitigate ESG supply chain risks, a comprehensive resolution is imperative. The first step should be to commit to an ESG roadmap. Secondly, assess the data collected from the supply chain to know the current status of the partners in the ESG roadmap. The third step entails correcting or refining several parameters to enhance the ESG standing. There are several platforms available in the industry that play a crucial role in this process, enabling businesses to gather and oversee sustainability data through ESG self-assessment. They provide insights, benchmarks, and guidelines for progress, contributing to a more sustainable and transparent supply chain.

In a world where climate change and social responsibility are at the forefront of societal concerns, businesses that proactively incorporate ESG principles not only contribute to a better world but also fortify their own sustainability and success. As we move forward, it is not just a matter of compliance; it is a strategic imperative for businesses to thrive in a future where sustainability is synonymous with success.

Published- 30th Nov 2023

Source- Etinsights