ESG is now a business reality
Environmental, social, and governance (ESG) is no longer just a buzzword floating around in today’s corporate realm. Issues around these three heads have become the top concern of business management and boards, and there are good reasons for the same.
As climate change is looming as a potential threat to humanity, it’s needless to say that effort has to be made by pretty much all entities of society to create a sustainable world. For the corporate enterprises, ESG is starting to form the foundation of a business framework that helps them achieve their financial and sustainability goals.
The importance of ESG is emphasized in the context of both SMEs and large organizations, especially amidst post-pandemic concerns and climate crises. After all, a conscious society is not solely dependent on government initiatives but also on socially responsible businesses capable of meeting its needs. It can foster equitable growth, employment creation, conservation of natural resources, and protection of consumers’ interests, to name a few.
A high ESG rating lowers the risk profile of enterprises in all industries by facilitating their top-line growth and reducing regulatory and operational hurdles. Many investors seek intelligent investing options in enterprises that adhere to high ESG standards. As such, those small and medium enterprises (SMEs) with a strong focus on ESG will be better positioned to attract investor interest.
What about the finance sector?
While ESG standards are crucial to all industries, the finance sector deserves a stronger ESG focus. Financial institutions across the globe are increasingly confronting risks due to reporting and regulatory requirements that revolve around the impacts of their business operations on ESG. As such, it’s of the utmost importance that financial institutions, which deal in billions of dollars on any given day, devise a robust ESG strategy to achieve long-term competitive success and avoid regulatory complications.
As a part of ESG compliance, the performance of finance companies and financial institutions is steadily shaping lending criteria, investment-related decision-making, and insurance factors. So, it becomes clear that the finance companies that are unable to create and implement an ESG strategy are at a higher risk of losing resilience and the long-term feasibility of their business.
For financial institutions, a primary environmental concern has been the shift to green or sustainable financing, a vital determinant of an organization’s reputation and a regulatory mandate. The governance concerns of financial institutions revolve around board structure, particularly board diversity, transparency and audit quality, and issues around remuneration of professionals, for example, executive pay. Labor management policies, well-being, safety, health commitments, and other labor standards are some social concerns facing financial institutions and social equality, customer privacy, and diversity and inclusion policies.
Conclusion
Financial institutions vary significantly in readiness for the shift to sustainability. As ESG concerns are getting global attention, the need for financial institutions to take action will increase. The agility of organizations to respond to changes in laws, regulations, and market expectations will be critical to success. Companies adopting a systematic and proactive approach to ESG will have greater resilience.
