A case for ESG

I have been guilty of looking at Environmental, Social and Governance (“ESG”) frameworks from a “check- box” or "compliance lens” but when you look beyond ESG and try to gauge "Impact"; the possibilities are infinite.  

Impact is forward looking and change provoking. It could be seen in the way a business promotes gender diversity, facilitates outreach, fosters equality and inclusivity, reduces carbon foot print, promotes process innovation, or even achieves more resilience.

ESG is a risk mitigation framework. An ESG strategy would mean investing in companies that score high on three non-financial parameters—environment friendliness, social responsibility, and governance. On the other hand; Impact investing is an investment strategy that generates financial returns coupled with positive measurable social and/or environmental outcomes. 

Increasingly stakeholders want their businesses to be more sustainable and “to care” as they scale. Fund of funds, high net-worth investors, PE-VC funds, financial intermediaries, broking houses, and even Limited Partners have to demonstrate that they are investing and choosing portfolio companies that generate returns sustainably. Further, even if one argued that ESG factors do not improve performance, there is no recent evidence that suggests that integrating ESG will hurt performance. Simply put, ESG is a philosophy on which a good business should be built.

ESG links to cash flow in important ways such as promoting top-line growth, reducing costs, minimizing legal and regulatory issues, improving employee productivity. These aspects should be part of a leader’s mental checklist when approaching ESG. ESG integration and the associated “Impact Outcomes” when measured over time; could be far more fascinating and valuable than just an IRR or MOIC on an investment