Environmental, Social and Governance (ESG) is one of the mechanisms that the investors use to evaluate their investment decision regarding a project. The concept of ESG started taking shape in the early 1990s when the notion of sustainability was gathering momentum. It is based on the idea that organizations not only need to focus on profits but also on people and the planet for long term profitability and sustainability. ESG can be seen as a further extension of CSR. Modern investors are increasingly taking ESG into account in order to evaluate the risk involved in investing in a company or project.
Modern society is conscious about the current and future situation of its environment. The future generations are expected to be more aware and concerned about their environment. Therefore, the infrastructure companies not only need to think about the circumstances of today but also the distant future. Factors like climate change can also adversely affect the performance or even existence of any project.
Every infrastructure project is built to serve the society. Infrastructure finance is increasingly taking the social factor into account while evaluating any project for risk. New age financers and institutional financers are convinced that the success and profitability of any project depends on how it treats the society, the people who work for it and how much value it creates for the society.
Modern business is not only about making profits, it also about giving back. Social groups are becoming more and more conscious about what value any project will create for society. Not creating value for the society can bring in the risk of resistance from the community or even boycott.
In a dynamic economic system in which today’s corporates function, efficient management could be the difference between the success and failure of an organisation or project. ESG calls for a diversified, unbiased and gender balanced management system, especially when it comes to higher management or the board of directors. Business ethics and transparency in the reporting system of the organisation are also becoming very important. Since infrastructure projects have very long serving periods, long term value creation by the projects is also an important component of the ESG matrix.
ESG might be in the nascent stage in India, it is already an important criteria of risk analysis of a project in the developed countries. In India, the awareness about ESG is rapidly increasing. It might also be an important factor for Indian corporates very soon. Hence the ESG component should be taken very seriously to attract the investments.