Top 5 Reasons Why Firms That Fail The ESG Test Will Be In Trouble By 2030

In the current corporate scenario, the integration of Environmental, Social and Governance (ESG) into every business ecosystem has become extremely important. Following the Kyoto Protocol which was adopted in December 1997 and came into force on 16 February 2005, nearly 200 parties across the world have committed to emission reduction. With increasing consciousness about our environment, businesses are moving towards net-zero models.

Regulatory Pressure

With the world waking up to environmental concerns, regulations on businesses are getting more and more stringent. The Kyoto Protocol defines the mechanism of cap and trade at worldwide level, by breaking down countries into Annex I, Annex II and non-annex countries. All the parties have pledged net-zero commitments. Many sector coalitions, such as energy, steel, and many more are aiming at net-zero emissions by 2050. Another gamechanger has been the ESG disclosure standards. At the moment disclosing financial and impact materiality has been facultative. Starting from 2025 in Europe, disclosure on the CSRD ESRS will be mandatory for more than 50,000 organizations; and this is just the beginning, as more and more charters will come into force which will be binding upon businesses worldwide to follow ESG protocols.

Operational risks

Towing the ESG lines will help companies in running their businesses seamlessly. It will help in tracking supplies and maintain transparency in operation, which will further help in ESG reporting. ESG reporting helps in managing data in a more cohesive manner leading to drawing various business insights. However, in the absence of proper data collection and reporting, the businesses run the risk of mismanagement and operational risks.  Avoiding to aim towards zero waste or to increase reuse and recycling instead of disposal can lead to cost increase and carbon emissions.

Investor Expectations

As per a 2020 study by Morgan Stanley, 85% of individual investors are interested in sustainable investing. UN Principles for Responsible Investment is the international framework that is driving policy changes at firm level. Also investments such as Green bonds are fixed-income investments used to fund projects with a positive environmental impact. They are becoming more and more common as a way to finance green initiatives with the support of investors sensitive to the green topic. The EU Taxonomy is the European financial framework which classifies economic activities aligned with a net-zero target, in order to promote and prioritize investments. More such investment policies are gradually but surely forcing companies to abide by green initiatives.

Consumer preferences

Today it’s important to include a new customer persona when it comes to identifying possible buyers and customers. There is an increasing customer base that is making a “green choice”. They care about the origin and production processes of the products they buy, thus forcing companies to follow the green route. Brands which fail to offer green products will definitely lose out to brands with green, eco-friendly products.

Brand Reputation

Today, a company’s brand’s reputation depends a lot on its ESG practices.  The Central Consumer Protection Authority had released draft guidelines on prevention of greenwashing for public consultation. The draft guidelines state that all green claims must be backed by “verifiable” evidence and full disclosures regarding claims. The claims should be directly made available through QR code or web links.

In conclusion, with so much binding upon companies in the form of green policies; from regulatory pressures, investor interests to consumer preferences, it is best that companies get serious about their ESG initiatives. These ESG protocols besides aiming towards better green, net-zero businesses, also augurs well for the brand’s reputation.