ESG: Driving Financial Growth and Shaping Stakeholder Expectations
The importance of ESG (environmental, social, governance) as reflected in the five fold increase of internet searches since 2019, indicating its growing significance. Companies across different industries have consistently been improving their ESG practices by allocating more resources. Previous blogs have discussed the effect of ESG on investing. In this context, it is worthwhile to note also that the ESG market will double this year. ESG is also likely to significantly impact not just investors but also consumers and stakeholders. It is now an accepted industry knowledge that the companies that follow ESG best practices have higher financial growth and better performance. In comparison, companies that performed poorly on ESG experienced a higher cost of capital and higher volatility.
Companies usually communicate their practices and initiatives to regulators and the public at large (e.g., positive contributions back to society, lowered carbon emissions, etc.). Third-party organizations consolidate these communications from across industries, which are predominantly in the form of textual reports to create ESG metrics. Consequently, organizations and particularly financial services organizations face increased pressure to disclose information about ESG strategies and their practices.