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Home Management Leadership Growth Strategies Corporate Social Responsibility

Lag remains in applying strategy to ESG

FutureCIO Editors by FutureCIO Editors
December 15, 2022
Photo by SHVETS production: https://www.pexels.com/photo/crop-unrecognizable-female-psychologist-and-patient-discussing-mental-problems-during-session-7176319/

Photo by SHVETS production: https://www.pexels.com/photo/crop-unrecognizable-female-psychologist-and-patient-discussing-mental-problems-during-session-7176319/

The Infosys report, ESG Redefined: From Compliance to Value Creation, claims that executives said their ESG spending led to moderate or significant financial returns. Up to 66% experienced ESG returns within three years. The report acknowledges that despite ESG's clear link to profit growth, budgets are likely to be an obstacle in the current economy.

This is worrisome, as companies need more financial resources and operating model changes to achieve ESG goals and sustain profitable growth.

Infosys president Mohit Joshi says there is nothing novel about the idea that you must spend money to make money.

Mohit Joshi

“Although 90% of respondents in our study say ESG gives ROI, there is still a lag in applying strategy to ESG as it is done for other parts of their businesses. Companies must shift views to recognize ESG as a value creator to reap the financial benefits of ESG investments and to achieve maximum impact in creating a better, more sustainable world."

Mohit Joshi

Strategy alignment and execution will allow businesses to accelerate their ESG initiatives with greater payoff.

Suggestions to accelerate ESG's financial rewards:

ESG is a proven moneymaker. The report found that a 10-percentage-point increase in ESG spending correlates with a 1-percentage-point increase in profit growth. A company that currently spends 5% of its budget on ESG can expect a one percentage point profit increase if it aligns its operating or capital budget to increase the ESG spending portion to 15%.

Overlooking the 'S' and 'G' in ESG reduces profitability. Many companies focus ESG efforts on the environmental segment with commitments to carbon neutrality, net zero, and reducing greenhouse gas emissions. However, there are also opportunities to improve financial results through social and governance initiatives. Research data shows social initiatives like board diversity correlate to improved profitability.

ESG leadership strategy correlates with a 2-percentage point increase in profit and revenue growth. Companies perform better financially when they demonstrate all the following: a chief diversity officer (CDO), chief sustainability officer (CSO), ESG committee on the board, and when the CSO clears capital expenditures for ESG initiatives.

However, only 27% of those surveyed say their company has all four components in place. The survey data analysis also found that the C-suite and top executive ranks were the most neglected areas for ESG changes.

Only 19% of respondents say their company ties executive compensation to ESG goals, and just 30% say their firms place responsibility for ESG with the C-suite.

Supply chain transparency matters. The research found that almost all companies are interested in aligning their ESG goals with their supply chain, especially as more companies are expected to account for their scope 3 greenhouse gas emissions.

However, less than one-third share ESG expectations or requirements for suppliers. Only 16% say they renegotiate contracts based on ESG data from those in the supply chain — indicating a clear need for more leadership in the supply chain and incentives to share ESG data, whether it's meeting new contract requirements or making themselves more appealing to others in the supply chain.

Related:  ExecOpinion: The race to leadership in parity
Tags: environmental social governanceESGInfosys
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