“A good idea is something that does not solve just one single problem, but rather can solve multiple problems at once.”
Shigeru Miyamoto, the Japanese game designer and creator of some of the best-selling game franchises like Mario, The Legend of Zelda, Star Fox, and Pikmin, always believed in development as a whole instead of focusing on just one aspect and the narrative. “The important thing is that it feels good when you’re playing it,” he once said, adding that quality is not determined by the story, but by the controls, the sound, and the rhythm and pacing.
In industry and development parlance, this would mean that the decision to roll out a project or launch a product must be evaluated not just by the narrative around how it will solve a particular problem, but also by how it will deal with the environment, social, and governance (ESG) concerns arising out of it, and impact multiple other stakeholders; all should “feel good” when the project is rolled out or the product is launched.
Alas! That has not been the case in the real world where investments have largely been made for financial gains, as well as to meet umpteen human needs, and in complete disregard to the nature. Historically, too, the privileged have exploited locals, workers, discriminated against fellow beings, and flouted regulations for a shortcut to more RoI.
Add to this the global concerns for climate change, environmental degradation, resource scarcity – a result of improperly managed human development fueled by consumption – and Miyamoto’s words start to make more sense; proper development is one that addresses not just one issue but also mitigates concerns arising from the development work itself.
“Disasters related to climate change, water and energy crisis and waste are often perceived as the next big challenge the world may face. Climate related calamities are being experienced by people across the globe – unusual wildfires, cyclones, floods, and droughts have become more frequent and prominent in recent times. Companies do realise now that environmental and social responsibilities are inseparable from business success, and therefore ESG is getting more importance than ever before,” says Dipankar Ghosh, Partner and Leader – Sustainability, Climate Change, and ESG, Thinkthrough Consulting.
“Stakeholders, including investors now expect companies to behave responsibly not only for the mankind at large, but also for continuity of business sustainably, ensuring return of investment,” he adds.
TIME FOR ESG IS NOW
The norms for mapping organisations on ESG parameters have evolved during the last two decades from the need to evaluate how the triple-bottom-line approach can integrate with transparency in reporting so that the investors can get a much clearer view of the risks involved, and the company’s ability to mitigate the impact of global warming, as well as crises like the ongoing COVID-19 pandemic and the lockdown that has been impacting the world economy like never before.
“The concept of ESG framework originated in 2001 in the UK. However, it was in its incipient stage till 2006 when it was given shape and introduced in UN Principles’ of Responsible Investment (PRI) report. The idea was to financially evaluate the companies with a focus on developing sustainable investments. Global Reporting Initiative (GRI) started using the term and the evaluation matrices from 2009 onwards,” points out Prof. Amit Kapoor, Honorary Chairman, Institute of Competitiveness.
According to Gopal K. Sarangi, Assistant Professor, TERI School of Advanced Studies, recent observations indicates that the corporate sector has become a victim of poor governance systems, resulting in poor societal and environmental outcomes. “Global examples of high-profile imprudent material environmental, social, and governance incidents, such as the Deepwater Horizon oil spill, Volkswagen’s breaching of environmental norms, and Facebook’s data privacy disclosure, are examples of such poor governance systems and structures, reiterating the need to integrate the ESG factors into investment decision-making processes,” he says in the Asian Development Bank Institute (ADBI) working paper ‘Resurgence of ESG investments in India: Toward a sustainable economy’.
“Any organisation that is ESG complaint is simply more resilient to market and even non-market externalities. An ESG conscious enterprise will have business processes that are more sustainable, scalable and future proof. Hence it is no surprise that companies with high ESG ratings significantly outperform the laggards, up to 2X in returns,” explains Mrinmoy Chakraborty, VP and Head – Digital Transformation, SOLiD Korea and Chief Transformation and Innovation Officer, Al-Dabbagh Group.
Experts point out that since the ESG principles are based on responsible investing, ethical practices, environmental preservation, and development of people, it enables organisations to better deal with the VUCA – volatile, uncertain, complex and ambiguous –forces, disrupting the market at the speed of thought. “The pandemic has tremendously affected every sphere financially. The right investment based on ESG norms can help companies sustain themselves, and in a larger context, the environment and the planet,” Kapoor says.
So, is COVID-19 a turning point for the ESG movement in the world, and how can Asian economies achieve their sustainability goals?
PANDEMIC BRINGS THE CHANGE
The Coronavirus unleashed a global financial crisis and instability at an unprecedented scale – sparing no country, and impacting governance, businesses, civil societies and infrastructure all over. According to a PwC report, the pandemic heightened awareness of how interconnected the world is and how rapidly external shocks can work through the global economy, and how central trust and transparency are to the economy’s operation.
“COVID-19 has been a ‘Hit Refresh’ moment for everyone on the planet. In terms of risk exposure to business, the pandemic created similar levels of shock that a potential climate risk could. Hence this black swan event also turned out to be a wakeup call for business,” says Chakraborty, adding that all traditional financial metrics, business fundamentals and risk assessments now demand a fresh look since business leaders have started to realise that ESG could potentially be the biggest corporate competitive advantage in the future.
“Doing well by doing good, is probably the only way to create a sustainable profitable business model in the new normal world,” he says emphatically. “The fact that investment on ESG funds skyrocketed to USD 1.4 trillion in 2020, from USD 0.5 trillion in 2012 is also an indicator and it essentially proves the adage that nice guys can also finish first.”
Agrees Kapoor, as he points out that sampling by rating agencies during the pandemic indicate that companies with higher ESG scores have outperformed the companies with lower scores. More important is the observation that the impact of such financial crisis situations gets attenuated and become lesser for the companies having higher ESG rankings.
“High sustainability firms that laid more stress to ESG norms continue to sail optimally absorbing the shock caused by COVID-19 because they are more environmental sensitivity, have high social standards, and good governance practices – initiative that make them more resilient and agile,” he explains. “Since complying with ESG norms also requires a broader digital footprint, the digital readiness ensured that these companies could afford to take on the financial impact of market shocks better.”
“Some of the renewable energy companies in solar, EV and Hydrogen spaces that are inherently more ESG compliant had phenomenal growth in Asia during the recent market shocks created by pandemic. For example, the rooftop solar market demand in India exploded during pandemic times. Supply chain visibility startups offering cold chain solutions in pharma, perishable food also have phenomenal growth. FMCG companies that had invested in resilient supply chain and had a diversified sourcing strategy were, to a large extent immune to pandemic,” points out Chakraborty.
Does that mean that ESG initiatives that have so far been driven by reporting metrics for financial and investment reasons, will be transforming the DNA – every aspect of business?
THE NEXT WAVE OF TRANSFORMATION
A concern for change that had been slowly shaping the way organisations and countries conduct themselves on the environment, social, and governance front for over two decades, has not just been accentuated due to the pandemic, ESG is fast emerging as the next big wave of corporate and business transformation.
“For 65,000 years, the human race learned to adapt to the environment in which existence placed them. The cumulative learning was then put on steroids 200 years ago to give birth to the Anthropocene age. Temperatures that had kept within a range started shooting up and we have seen several extreme climate incidents in the last two decades of the 21st century. COVID-19 has dramatically altered our mental engineering,” says Shailesh Haribhakti, Chairman, Shailesh Haribhakti & Associates.
“Every aspect of business is being reimagined and made more productive. We need to rapidly learn to deal with stranded assets and non-flexible mindsets and put the entire race into a new trajectory of deep and new learning to cope with this New World that we are creating. It is an exciting journey worth being on,” he adds.
It sounds like ESG is the new zeitgeist that companies have to embrace for better survivability, competitiveness and performance, as well as for the overall good of planet earth?
“There are societal, environmental and governance issues that the CEO or the head of the organisation, private, public or corporate have to take into account. The company has to take care of the ESG issues pertaining to investors, regulators, consumers, media and employees. They all want companies to meet their ESG commitments and hence all organisations will be under the scanner,” warns Kapoor. He further notes that ESG is a holistic approach that needs to be implemented at all levels.
“Today, organisations need to ensure that energy is optimally consumed and there are no carbon emissions, relationship with the people in the communities, consumers and the labour force is cordial and meaningful, fair practices are followed in processes, controls, procedures and compliances legal, financial and institutional. And all this is achievable only if it is top driven with clear policies and continuous efforts at all level to align organisation goals with the ESG norms,” he elaborates.
This also means that organisations need to transform on all fronts – technological, cultural, operational, financial, and legal.
“When it comes to ESG in the context of office facilities, green energy efficient buildings, IT infrastructure, data and cyber security policies all add up. ESG is critically important when it comes to sourcing and procurement practices. It includes supplier diversity, ethical buying, reusability, material souring, recycling, waste management and even waste to value creation. It finally ends with financial disclosures as per the industry standard frameworks such as Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures (TCFD),” adds Chakraborty.
All this requires a structured approach that begins with understanding the ESG risks and opportunities through consultation with all business stakeholders. Elaborating on the step-by-step approach for ESG transformation Ghosh says that the consultation process should be followed “by listing the ‘material’ topics and selection of performance indicators across such topics, which may be monitored.”
“ESG needs to be integrated into all business functions, and not to be seen as a separate function, and therefore it is important to assess business functions from ESG-related maturity. Integration of ESG vision and mission into business imperatives is of utmost importance, followed by robust strategy and roadmap to achieve the same at par with leading practices in the industry,” he adds.
Sharing insight on how ESG will drive the next wave of transformation, a PwC report points out that ESG has the potential to revamp how successful organisations plan, implement and operate. It also says that like digital transformation (DT),ESG can completely change what an organisation does. “It gets to the heart of why you are in business, who you are as a company, what your impact on the world is, how you align your business model with the needs of society, what you report, and how you engage your people and with your stakeholders more generally,” the report states.
Well, it sounds like DT and ESG are two sides of the same coin? Or are they not?
GO DIGITAL FOR ESG
Digital Transformation is the adoption of digital technologies and its tools for bringing in the transformational change in the way business is conducted and to provide best value to the stakeholders. And all this requires a renewed focus on business models, operational processes and customer experience; quite similar to prerequisites of the ESG transformation, and maybe intertwined.
In fact, the risks, compliances, performances, sustainability issues, and the pitfalls, are all required to be measured against the parameters of the ESG and this can be made possible only with the help of digital technologies. “Since the data and the ever-changing dynamics are going to be gargantuan, the full digital role will only let the companies perform optimally against the ESG parameters and metrics.
“DT needs to be an integral part of ESG transformation,” says Ghosh. “On one hand, ESG initiatives require a thorough understanding of performance indicators of ESG, as well as management and analytics of large data, and on the other hand, many ESG performance parameters are interdependent or dependent on other business parameters, which require extensive simulation or modelling to understand the outcome of any intervention,” he describes, adding that digital tools are inevitably useful for appropriate analysis and interpretation of climate risk and its implications as well as mitigation strategies.
Adds Chakraborty: “Every digital solution such as internet of things (IoT), artificial intelligence (AI), machine learning (ML), and robotic process automation (RPA) are essentially tools for sustainability. For example, a fleet management solution that provides real-time fleet visibility, does route optimisation, and fleet scheduling is essentially reducing fuel cost and promoting ESG. Reusable container and pallet tracking solutions using IoT tracking devices improves asset utilisation by about 20-30%, creating huge positive sustainability impact in the USD 38 trillion dollar supply chain industry. In fact, organisations will be more successful once they realize the synergy between DT and ESG.”
The other key area for collaboration with DT is the need for data gathering, analysis, and reporting that forms the key aspect of ESG. “Digital transformation can significantly impact an organisation’s ESG performance through improved data collections, reporting and analysis, and integrate such information into operational points and aspects of the business,” Ghosh elucidates.
He also points out that use of virtual prototyping (Digital Twin) of physical assets can enable companies to monitor materials, external conditions and maintenance, and thereby improve control and quality surveillance. “On environmental parameters too, virtual models can predict and optimise energy consumption, identifying opportunities to minimise waste as well as drive energy-efficient operations.”
While ESG as criteria to evaluate companies for investment by socially conscious investors has been in vogue in developed economies for long, the pandemic has made its need more noticeable across spectrum. Also, the controls, the sound, the rhythm, and pacing are in perfect synchrony to transform businesses and the whole.