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Increased ESG investment correlates with higher profits, according to new research from the Infosys Knowledge Institute, the thought leadership and research arm of Infosys. The report identified actions that companies should take now to achieve ESG goals and generate financial returns across sustainability initiatives.
The Infosys report, ESG Redefined: From Compliance to Value Creation, reveals that nearly all (90%) executives said their ESG spending led to moderate or significant financial returns. Most respondents (66%) experienced ESG returns within three years. The report acknowledges that despite ESG’s clear link to profit growth, budgets are likely to be an obstacle in the current economy. This is worrisome, as companies need more financial resources and operating model changes to achieve ESG goals and sustain profit growth.
Infosys President Mohit Joshi said, “There is nothing novel about the idea that you have to spend money to make money. However, although 90 percent of respondents in our study say ESG gives ROI, there is still a lag in applying strategy to ESG as it is done for other parts of their businesses. Companies must shift views to recognize ESG as a value creator to reap the financial benefits of ESG investments and to achieve maximum impact in creating a better, more sustainable world.”
Strategy alignment and execution will allow businesses to accelerate their ESG initiatives with greater payoff. The Infosys Knowledge Institute revealed several insights to guide companies to accelerate ESG’s financial rewards:
•ESG is a proven moneymaker. The report found that a 10 percentage point increase in ESG spending correlates with a 1 percentage point increase in profit growth. A company that currently spends 5% of its budget on ESG can expect a one percentage point profit increase if it aligns operating or capital budget to increase ESG spending portion to 15 percent.
•Overlooking the ‘S’ and ‘G’ in ESG reduces profitability. Many companies focus ESG efforts on the environmental segment with commitments to carbon neutrality, net zero, and reducing greenhouse gas emissions. However, there are also opportunities to improve financial results through social and governance initiatives. Research data shows social initiatives like board diversity correlate to improved profitability.
•ESG leadership strategy correlates with a 2 percentage point increase in profit and revenue growth. Companies perform better financially when they demonstrate all the following: a chief diversity officer (CDO), chief sustainability officer (CSO), ESG committee on the board, and also when the CSO clears capital expenditures for ESG initiatives. However, only about a quarter (27%) of those surveyed say their company has all four components in place. The survey data analysis also found that the C-suite and top executive ranks were the most neglected areas for ESG changes. Only 19% of respondents say their company ties executive compensation to ESG goals, and just 30% say their firms place responsibility for ESG with the C-suite.
•Supply chain transparency matters. Research found that almost all companies are interested in aligning their ESG goals with their supply chain, especially as more companies are expected to account for their scope 3 greenhouse gas emissions. However, less than one-third share ESG expectations or requirements for suppliers. Only 16% say they renegotiate contracts based on ESG data from those in the supply chain — indicating a clear need for more leadership in the supply chain and incentives to share ESG data, whether it’s meeting new contract requirements or making themselves more appealing to others in the supply chain.