Beyond Trade-offs: Importance of making sustainability aspirational and profitable

Embracing ESG principles isn't just about being socially responsible; it's about survival in the marketplace and as a species on the planet

By Ameya Agrawal and Prof Priya Nair Rajeev

Published: Dec 5, 2024 02:36:06 PM IST

Updated: Dec 5, 2024 02:40:51 PM IST

ESG factors are increasingly becoming a strategic choice for long-term economic viability and success. Image: Shutterstock

Environmental, Social, and Governance (ESG) and sustainability may have sounded like the indie band everyone claimed to love, but no one listened. But not so anymore. According to a PwC survey, 49 percent of investors are willing to divest from companies that don't take sufficient actions on ESG issues. Business leaders, aware of this, are stepping up their ESG efforts, with consumers also increasingly supporting sustainable brands. So now, there is no issue with the narrative, but there is a challenge with the number test. The question is, does it financially make sense to go green?

Traditionally, if decision-makers only look at shareholder value, going green might be costly. And on the consumer front, sustainable goods carry the burden of a high-end price tag, making them feel more like a splurge than a necessity. This standoff leads to the ultimate showdown: the 'Number Test.' It is a litmus test of business viability, whether pursuing green can also fill the coffers with green. Sustainable practices are not an expense but an investment, and they benefit the planet and the wallet. The real magic happens when businesses realise they can profit by going green. Now, that's music to any investor's ears.

ESG factors are increasingly becoming a strategic choice for long-term economic viability and success. For example, if you watch Shark Tank India on Sony, you may have noticed that many of the ideas presented on the show highlight sustainability as a key differentiator. An ESG focus has helped these businesses secure funding from the sharks and be successful thereafter. Some examples include Bamboo India, India Hemp, Wakao Foods, and Caragreen.

Investors are increasingly becoming more interested in ESG. According to a global survey by PwC1, 79 percent of investors consider ESG risks before investing, and 75 percent believe companies should prioritise ESG issues, even if it means lower short-term profits. In India, the top 1,000 listed businesses must submit a Business Responsibility & Sustainability Report (BRSR) by SEBI. Beyond the gate-to-gate strategy, Indian companies must create a sustainable value chain.

This presents a new challenge for most businesses, with no established frameworks for materiality assessments. The toughest part is that the most significant part of the impact chain is often beyond the company's control. For example, who is to manage the waste generated by used plastic milk packets, water bottles, or soda cans—the consumer, the municipality, or the company?

So what's in it for companies? Firstly, according to a study by McKinsey & Company, those with high ESG ratings consistently perform better in both the medium and long term. And while sustainable funds slightly underperformed traditional funds in 2022, the growing interest from investors led to an increase in overall assets under management.

Also read: India at Crossroads: Embracing ESG for a sustainable future

Secondly, focusing on ESG is also required to navigate increasingly stricter regulations around waste, carbon footprint, and environment conservation. For instance, to reduce the 11,000 tonnes of waste generated annually in the EU because of the disposal of unused charging cables, European regulators have mandated that all electronic devices sold after autumn 2024 must use the USB-C connector for charging ports.

Thirdly, ESG activities positively impact brand trust and loyalty with each ESG dimension. Patagonia's 'Don't buy this Jacket' promotion is a prime example of an environmentally conscious business strategy. The advertisement emphasised the harm one of the company's best-selling fleece jackets caused the ecosystem. Customers were urged to choose a used Patagonia item instead of the product and to think twice before purchasing. Despite this unorthodox strategy, the company's revenues increased by 5 percent in 2013 and almost 30 percent to $543 million in 2012. The company's sales reached $1 billion in 2017. These kinds of instances demonstrate that sustainability benefits businesses in addition to the environment.

Fourthly, linking ESG efforts to direct personal and monetary gains can also significantly increase engagement, as people are often more motivated by immediate and personal benefits than distant, abstract concepts. For instance, if working on social issues offers career advancement opportunities or sustainable practices lead to direct cost savings or health benefits, individuals and businesses are more likely to take an active interest.

It is crucial to make sustainability aspirational and 'profitable.' For instance, processing a million tons of garbage might not seem glamorous. But transforming that waste into clean energy and powering a city the size of Mumbai becomes a narrative of a sustainable future, heroism, and innovation. These challenges are not just for the companies in the context of their consumers but also for society.

It's crystal clear that companies are waking up to the harsh reality that embracing ESG principles isn't just about being socially responsible; it's about survival in the marketplace and as a species on the planet.

Ameya Agrawal, Alumni, IIM Kozhikode and Prof Priya Nair Rajeev, Head- Centre of Excellence for Social Innovation (CESI), IIM Kozhikode