Measuring businesses have changed over the years. Not only for their economic impact, factors like environmental, social, and governance are also included. Therefore an ESG strategy must be implemented as a best practice of running a business nowadays.
ESG practice in Indonesia is regulated in UU No. 32/2009 regarding Environmental Protection and Management and Indonesia Financial Services Authority (OJK) No. 51/2017 regarding implementing Sustainable Finance. The shift in people’s perception of business is a tremendous opportunity for companies to enhance their brand image, attract investors, and drive sustainable growth.
What is ESG?
ESG practices are considered the future of business. Investing in ESG is quite popular, with investors increasingly seeking companies committed to the cause and responsible for how they run their business. Learn more about the three pillars of ESG.
Environmental
The environmental pillar considers how a company impacts the environment. This means how your businesses handle factors such as pollution reduction, resource management, and climate change mitigation.
Social
The social aspect focuses on how a company interacts with its stakeholders, including employees, suppliers, vendors, and the community. It involves ensuring fair labour practices, disseminating inclusivity, and giving back to the community.
Governance
Talking about governance, it refers to a company’s internal management and practices. This particular pillar must show transparency, accountability, and adherence to ethical business principles.
The Importance of ESG for Business and Investors
ESG practices refer to a set of guidelines businesses follow to identify and manage environmental, social, and governance risks. Implementing ESG practices helps enhance long-term sustainability and operational efficiency.
By adopting these practices, companies can improve their reputation and build stakeholder trust while aligning their financial interests with environmental and social goals. This integration allows businesses and investors to contribute to a more sustainable and equitable future.
How to Implement an ESG Strategy
Understanding Environmental, Social, and Governance (ESG) factors in sustainable investing is crucial. Investors can leverage four main approaches to integrate ESG considerations into their decision-making process.
1. ESG Integration
ESG integration means systematically incorporating environmental, social, and governance factors into the traditional financial analysis process. Investors delve into how ESG practices influence its long-term financial performance and risk profile. For example, environmental negligence may result in fines or damage to reputation, affecting the stock price.
2. Exclusionary Screening
Exclusionary screening utilises clear criteria to actively exclude companies or entire sectors that fall short of an investor’s ESG standards. These criteria might encompass involvement in controversial industries, such as tobacco companies, inadequate environmental practices, or weak labour standards.
This implementation allows investors to align their portfolios with their values and potentially mitigate exposure to high-risk ESG companies. However, it’s important to consider the potential for limited diversification with this approach.
3. Inclusionary Screening
The inclusionary screening strategy aims to identify companies that exhibit leadership in ESG performance within their respective industries. Investors may prioritise industry leaders in sustainability, strong corporate governance practices, and positive social impact. This enables investors to support companies driving positive change while potentially benefiting from their long-term success tied to strong ESG practices.
4. Impact Investing
This approach is focused on implementing ESG in a mission-driven manner. Investors aim to produce positive social and environmental outcomes and financial returns. Impact investors typically target companies that prioritise renewable energy, sustainable agriculture, or initiatives that advance social justice and community development. Measurable social and environmental impact is a key consideration, in addition to financial goals.
How to Implement an ESG Strategy
A tailored ESG strategy aligned with your values can give your company a competitive edge. Follow these key steps to craft one:
- Supervise ESG Program
Active engagement is crucial for guiding and defining ESG best practices and reinforcing the concept of the ESG strategy as a top priority.
- Define ESG issues
ESG frameworks serve as essential systems to standardise ESG reporting metrics and provide valuable references to identify key benchmarks and metrics.
- Establish SMART objectives
SMART (Specific, Measurable, Achievable, Relevant, and Time-Bound) methods can provide companies with a clear timeline and facilitate monitoring process to set their clear goals
- Integrate ESG principles into work ethic
Companies can start incorporating ESG practices into their company culture by training the management and employees and ensuring consistency for long-term improvements in ESG practices.
- Generate ESG reports
ESG reporting with InCorp allows companies to measure and showcase the progress of their ESG practices. These reports can also boost employee morale by demonstrating their impact on daily work life and encourage stronger buy-in for ESG goals.
- Public information and ESG disclosures
Companies often align ESG narratives with their brand and vision to help retain consumer trust. With growing public awareness of sustainability issues, catering to ethically and sustainably minded consumers is crucial for building trust and loyalty. Tailor your marketing strategy to integrate ESG practices with Elite Asia to ensure your brand is connected with socially-conscious consumers and enhance your brand’s appeal.
5 Ways ESG Can Add Value to Your Business Growth
Here is the breakdown of 5 ways ESG practices can add value to your business growth:
1. Expanding Market
ESG propositions help companies to enter new markets and expand businesses into existing ones. ESG can drive consumer preferences; 70% of consumers are willing to pay additional costs for green products. Studies have also found that companies with social engagement activities achieve higher valuations.
2. Reducing Costs
Implementing ESG strategies can reduce costs by addressing raw materials costs, water usage, carbon emissions, and other operational expenses.
3. Compliance and Government Support
A robust ESG framework not only enhances companies’ external value proposition but also mitigates regulatory risks and fosters government support, thereby safeguarding corporate profits.
4. Increasing Productivity
Fostering a sense of purpose and promoting positive social impact can attract and retain top-quality employees, leading to higher job satisfaction and enhanced productivity.
5. Optimising Investment and Capital Expenditures
Improved investment returns can be achieved by allocating capital towards promising and sustainable ventures, facilitated by a robust ESG proposition. ESG helps companies avoid stranded investments and align financial objectives with broader societal and environmental priorities.
The ESG Power and its Value Creation in Five Essential Ways
| Strong ESG Proposition (examples) | Weak ESG Proposition(examples) | |
| Expanding Market | Attract B2B or new customers with more sustainable products Achieve more access to quality resources | Risk losing customers through poor sustainability practices Risk losing access to quality resources |
| Reducing Costs | Preventive maintenance Lower energy consumption | Unnecessary waste Incur fines, penalties, and enforcement actions |
| Compliance and Government Support | Reduce compliance burdens Benefit from government grants | Face limitations in marketing and sales practices Potential consequences include fines, penalties, and enforcement actions |
| Increasing Productivity | Foster a motivated and productive workforce Create a more innovative and problem-solving team environment by prioritising diversity | Employee burnout and reduced productivity Inefficiencies and missed opportunities |
| Optimising Investment and Capital Expenditures | Ensure investments prioritise long-term value Avoid poor investment decisions because of longer-term environmental issues | Focusing solely on short-term profits and neglecting investments in long-term Investing in unsustainable technologies that incur high maintenance costs in the long run |
ESG for Overall Business Sustainability
Integrating ESG practises into your business operations can lead you to long-term success. A robust ESG strategy fosters resilience, mitigates risks, and creates competitive advantages, attracting investors, consumers, and top talent in your business environment. Ultimately, focusing on factors is an investment that will ensure a sustainable and thriving business.
This article has been produced in collaboration with InCorp Indonesia.
