Why ESG is a value driver for building customer relationships, brand reputation and M&A strategy

In a world that is striving to truly stay below the 2°C threshold, Environmental, Social and Governance (ESG) has evolved into a catalyst for value generation. Business leaders in India are on board and recognise that E, S, and G are no longer just nice to have, to build successful and sustainable businesses, but extremely integral to long-term financial success.

Encouraging trends have emerged from the KPMG 2023 India CEO Outlook Report regarding CEOs in the country ramping up their ESG strategies. While they believe that it will have the greatest impact on seven key areas of their business, ESG will serve as a value driver in building customer relationships, brand reputation, and M&A strategy. Addressing ESG challenges is a key component of their business operations and long-term strategy, as 54 percent of CEOs in India say that they have fully embedded ESG into their businesses.

Building sustainable brands and customer relationships result in customer loyalty, which continues to be one of the most critical factors that can deeply impact an organisation’s success. Perhaps that is the reason why, building customer relationships takes the top spot at 26 percent. CEOs in India and their global counterparts, agree that ESG programmes contribute towards improving customer loyalty in a big way.

Today, several leading brands across retail, financial services, travel, and telecom are intentionally fostering their ESG performance to build a good brand reputation and customer connect. By integrating ESG considerations into effective CX strategies, organisations can enhance their customer loyalty, improve their brand image, and perhaps even have a better chance at unlocking an estimated additional $200 billion in value. 

Pegged at 19 percent in the KPMG CEO Outlook report, M&A strategy is the second area where CEOs in India believe that they would have the greatest impact over the next three years. There is a remarkable increase in the appetite for M&As among CEOs in India rising from 42 per cent, last year to 48 percent, this year, despite economic uncertainties. 

However, with the M&A environment becoming more challenging, companies are putting a lot more focus on driving value creation in existing assets. The decades of free credit are behind us, valuations and interest rates are high and access to credit is difficult, resulting in limited value-creation levers, resulting in ESG getting much more attention as a value-creation tool.

Influenced by the sustainability criteria, companies are looking to merge with partners that can help them bring in ESG at the core of their operations. For instance, Indian automobile giants have merged with their EV subsidiaries to intensify their sustainability quotient. Big energy players are acquiring smaller players that can help them boost their renewables energy capabilities.

To enable a seamless M&A strategy, ESG due diligence (DD) is being conducted on target companies at an early stage. Those with strong sustainability stories and the data to back it up are getting acquired at a premium price. The goal is to create more sustainable, resilient, and attractive companies for investors, customers and employees going forward, not ESG for the sake of ESG.

The concerns about financing and stakeholder expectations in ESG are escalating and shared by 33 per cent CEOs in 2023, compared to 28 per cent, last year. This heightened importance on ESG that we are seeing in India today, is primarily driven by an increasing awareness among shareholders who aspire to associate with organisations that prioritise purpose over profit. But their focused approach is helping CEOs in India maintain a pragmatic perspective on the external environment. As a result, 33 percent of them have said that they are prepared to withstand the potential scrutiny from stakeholders/shareholders when it comes to ESG.  

As the world continues to combat the most adverse effects of climate change that humanity has seen in this century, it is heartening to see companies in the country prioritising their investment strategy accordingly. For instance, the report shows that 38 percent of CEOs in India are addressing environmental challenges to achieve net zero. Environmental/climate change has jumped up to the second spot as risks to growth in the coming three years in this year's report, from the fifth spot, last year. 

Today, even as we wait for net zero to become a reality from a pipedream, an impressive 42 percent of CEOs in India anticipate a significant return on their investment in three to five years which is very positive.

Lastly, the current wave of focus on ESG presents companies in India with an opportunity to shift to a new paradigm of creating shared value for all its stakeholders. Staying vigilant on the evolving ESG regulations, will enable them to uphold their brand reputation and customer relationships. While doing so, it also presents them with a unique chance to explore new opportunities that are bound to emerge as ESG will continue to remain an integral part of business growth discussions.

A version of this article was published on Dec 02, 2023  by The Economic Times Online.