A business’s performance, which was traditionally linked to pure-play financial and economic metrics, is now also taking full cognizance of the potential Environmental, Social and Economic (ESG) value erosion it can lead to. The demography of investors is also changing globally, with millennials demonstrating greater consciousness of the environmental and social impacts of their investments.
As better ESG performances have become a hallmark of a healthier enterprise, the KPMG in India’s CEO Outlook 2022 shows how CEOs in India, as well as globally, have begun viewing the importance of ESG initiatives on their businesses. This is especially when questioned about ESG’s impact on improving financial performance, driving growth and meeting stakeholder expectations. However, even as the ESG approach is increasingly seen as a key differentiator when it comes to attracting and retaining talent, half of CEOs in India struggle to tell a compelling ESG story about their sustainable, resilient, and purpose-led organisation.
ESG’s impact on financial performance
ESG Risks like Climate Change are going to be material for Indian companies as India is one of the most vulnerable countries to Climate Change which means that Indian businesses need to consider this in their business risk and strategy.
That ESG has become integral to long-term financial success, can be seen in the findings of the KPMG in India’s CEO Outlook 2022 Report. While 59 percent CEOs in India are looking to invest at least 6 per cent of revenue in programmes that enable their organisation to become more sustainable, they increasingly agree that ESG programmes improve financial performance. This includes aspects such as being able to secure talent, strengthen employee value proposition, attract loyal customers, and raise capital. Moreover, 57 per cent CEOs in India agree that their organisation’s digital and ESG strategic investments are inextricably linked to growth.
Real-time technologies for supply chain
The supply chain exposes companies to significant ESG risk especially around issues like Human right, Climate Change risk etc. that can have impact on its reputation as well as the business. Supply chain leaders globally as well as in India are starting to double down on investing in technology-including real-time, end-to-end analytics to improve visibility across the entire value chain. This will help them have a more accurate understanding of how products and materials flow through the network and where issues are in the supply chain, so they can move from mere strategic intent to real tangible outcomes.
CEOs in India increasingly see reporting and transparency as important to their ESG goals and this includes insight into their broader supply chain. Their success is dependent on their digital systems. Questions such as – Where does the business source their raw materials? and Do they know their suppliers’ human rights records?-- mean there is an increasing need to focus more broadly on ESG and into all the shadows cast by the organisation.
The number one strategy for CEOs in India as well as their global counterparts would be to mitigate supply chain issues to monitor deeper into their supply chain (i.e., at the third and fourth levels) to better anticipate problems. The reason behind this is that the environmental, sustainability and human rights practices of their partners and suppliers may impact their business and reputation.
Business leaders will be well positioned to influence their internal organisations and supplier behaviour and operations through the right policies and incentives. Add the power of digital technology, and companies can reimagine their supply chains radically to benefit the business and the planet.
Leading with inclusion for progress on IDE
Businesses in India are seeing a major focus put on the social aspect of ESG. While there’s a broad alignment on Inclusion, Diversity and Equity (IDE), there is growing concern around the pace of progress. For instance, in the KPMG in India survey, 58 percent CEOs in India believe that progress on IDE has moved too slowly in the business world.
To play a powerful role in helping lead and drive the IDE agenda in the years ahead, it is important to normalise IDE within companies and create a culture of inclusion and diversity across the organisation. With 71 per cent CEOs in India believing scrutiny of IDE performance will continue to increase over the next three years, an organisation’s management of relationships with its employees, suppliers, customer, stakeholders, and the community at large need to be given due attention. Our experience shows that the organisations are yet to operationalise their IDE commitment and it will take a significant initiative outside the organisational boundary and working closely with the community and institutions to help them achieve this.
A common narrative
With stakeholders expecting relevant and accurate data, it is imperative for companies to treat ESG disclosures with the same attention and care as financial disclosures and ensure governance around data measurement, analysis, and reporting. While leading Indian companies have actively started disclosing their ESG performance, they now need to direct their efforts towards overcoming challenges, particularly while articulating a compelling ESG story to stakeholders.
The complex process to realise the ‘true’ value of ESG practices begins with adopting the right approach towards them whether its implementation, measurement or communicating the impact. In the larger context, collaboration at various levels with different stakeholders will also pave the way to develop a common language for communicating impact and value creation. Doing so will help them to effectively showcase their commitment towards the overall sustainability agenda.
A version of this article was published on 25 February, 2023 by Economic Times Online