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How ESG is Transforming Finance

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In an episode of the Fenergo FinTalks podcast, our host Dhanum Nursigadoo was joined by Lesley Li, founder and CEO of uIMPACT and together they explored the pivotal themes surrounding Environmental, Social and Governance (ESG).

Many crucial issues were spotlighted in the episode, as the pair discussed whether ESG has the power to save the world, the hazards of greenwashing, the future of sustainable investing, and the importance of resilience in the current financial landscape. 

Let's unpack some key takeaways from their conversation.

The Growing Importance of ESG 

The COVID-19 pandemic triggered a surge in a global societal focus on sustainability, with companies facing mounting pressure from both grassroots and governmental angles to forge a greener world.

As a result of the rising concerns regarding climate change, diversity, and corporate ethics, stakeholders are demanding more transparency and accountability. This has compelled companies and investors alike to demonstrate a commitment to sustainability. These players are therefore increasingly embracing ESG to create value and gain a competitive edge.  

Strong ESG practices can create long-term value for companies and their stakeholders through several key ways:  

  • Talent and reputation 

ESG enables companies to attract talent, customers and capital, as stakeholders want to associate with socially and ethically responsible brands  

  • Cost savings 

Companies can assist their bottom line in combating rising operating expenses by executing sustainability strategies, like going green  

  • Enhanced ROI 

ESG frameworks improve investment returns by allocating capital to more sustainable opportunities 

  • Risk mitigation 

ESG practices identify non-financial risks, therefore avoiding lawsuits and easing regulatory pressure 

ESG Accountability and Responsibility 

ESG responsibility extends across corporate leadership and beyond the company walls to the broader value chain. This systemic effort demonstrates how ESG requires a commitment to the long-term. Business leaders and executives should therefore prioritize ESG initiatives and allocate resources towards ESG and sustainability efforts in order to formalize a strategy that is future-proof. 

Not to mention, investors are seeking out companies with strong ESG track records to invest in. Ultimately, the goal is to direct more capital towards assets and activities that align with environmental and social objectives.  

There is an evident correlation between sustainable business practices and financial performance that is causing investors to place greater emphasis on companies' ESG ratings when making decisions. In order to help companies evaluate their current ESG-preparedness, Fenergo offers an ESG Readiness Assessment on its website. This enables companies to check their ESG scores and determine their overall ESG maturity level.  

Li also explains that standardized ESG data and disclosure requirements, such as the EU Taxonomy and Sustainable Finance Disclosure Regulation (SFDR) regulations, hold promise for mobilizing private investment. However, this will be a marathon, not a sprint. Realistically, Li speculates that it will take a lot of time before these initiatives translate into meaningful, on-the-ground impact and capital shifts. 

The Pitfalls of Greenwashing and Poor ESG Strategies 

This increased societal focus on sustainability has opened the door for companies to engage in "greenwashing". In other words, companies make misleading claims about their environmental efforts in order to appear sustainable, without materially changing practices. 

Nevertheless, without proper ESG metrics and reporting frameworks, firms can leave themselves exposed to severe reputational damage, loss of customers and investor confidence, and ultimately compromised profits. In 2017, Volkswagen was hit with a USD 4.3 billion fine for its “dieselgate” emissions cheating scandal. This was followed by multiple splinter lawsuits from investors, and wiped billions off the value of the company.  

ESG reporting requirements are complex for businesses to integrate, which in turn enables greenwashing to go unchecked. However, the risks of inaction could cripple financial performance and revoke their social licence to operate.  

The Future of ESG 

Looking ahead, ESG investing is likely to keep growing as the newer generations who care deeply about ESG issues gain more investing power. As a knock-on effect, more investors will commit to net zero emissions targets and companies that fail to meet stakeholders' ESG expectations will continue to face backlash. As Nursigadoo states in the podcast, “sustainability is becoming a vector for profitability”. Corporations that fail to recognize this today will likely find themselves losing relevance and falling behind tomorrow. 

One of the key insights from the podcast was that ESG remains largely a misunderstood concept, which consequently hinders its potential impact. Though often touted as a way to "save the world," Li explained how ESG in its current form is not likely to drive major change on its own due to misconceptions, limited data standardization and accessibility. 

However, she underscored that sustainability is morphing from just a moral imperative to a value-driving business opportunity, and it is therefore imperative companies address issues like greenwashing, as they undermine ESG progress. Resilience will allow companies and their leaders to stick to their values and persevere in effecting positive change. Lee says “you win or you learn, you only fail when you stop trying”. With resilience, companies can stick to their ESG principles and strategies for the long haul.  

Listen to the episode in full here and subscribe to the Fenergo FinTalks podcast for more insights.