SICAN Insight #14
Adam Smith once famously noted in his book, The Wealth of Nations, that it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner but from their regard for their own self-interest. For centuries, such self-interest was mainly concentrated on direct profits and losses of individuals and companies. Consequently, the global economy grew exponentially, focusing on development and revenue generation, and the world developed at an unprecedented rate. However, the side-effects of such measures began to emerge in the mid-20th century, with various environmental, humanitarian, and other problems arising. To face such problems, individuals and organizations worldwide began exploring sustainability as a central value in self-interest, which eventually developed into the area of Environmental, Societal, and Governmental(ESG) values. As of 2022, various companies, both big and small, are committing themselves to the pursuit of sustainability through promoting ESG values.
Now, the critical question is, what exactly is ESG? ESG is a non-financial value set for the three central values. The first of those values is the environment. In evaluating such criteria, the impact of the particular company in the discussion of climate change is studied thoroughly, taking data such as annual carbon emissions and transparency of company policy into consideration. Other vital environmental factors assessed by the CFA Institute include but are not limited to: air and water pollution, biodiversity, deforestation, energy efficiency, and water scarcity. While the first value of ESG, the environmental value, receives the most attention, the second and the third values also have their own significant part. Regarding the societal impact, the second criterion of ESG, a company is assessed on its promotion of base social values such as equality, diversity, and so on. Programs that allow a significant rise in the inclusion of underrepresented communities and programs that help solve society's problems allow a company to receive high scores on the societal part of ESG evaluations. Additional factors that are taken into consideration regarding a company's societal impacts noted by the CFA institute include but are not limited to: customer satisfaction, data protection, and privacy, gender and diversity, employee engagement, community relations, human rights, labor standards, and more. The last criterion, governance, shows insight into how the company is operated. Bribery and corruption both inside and outside the company are taken into consideration, where such indicators could lower the governance score of a company's ESG evaluation. Additional criteria established by the CFA institute include but are not limited to: Board composition, executive compensation, lobbying, and whistleblower scheme.
Following the rising interest of both corporates and consumers in the market, consulting firms such as McKinsey & Company and Bain & Company are also providing consultations focused on incorporating ESG values. Telkomsel, one of the world's largest and most influential mobile operators, worked with McKinsey & Company to tighten the gap in interest access in Southeast Asia. Under the notion of simplicity and extended engagement, Telkomsel provided comprehensive internet services to the people of Indonesia, allowing previously limited fixed broadband access. Moreover, the company's innovative mobile application extended various online services to the Indonesian people, allowing services like online banking to be publicly used. Similarly, Bain & Company also worked together with a client(the exact name of the company remained unknown due to confidentiality) in 2022 to rebuild its greenhouse gas emission reporting sectors. Such improvements not only allowed the company to provide a transparent report to its investors and customers but also to react to various environmental problems quickly.
As shown by the cases presented, the promotion of ESG values not only enables sustainability but eventually allows companies to increase their returns on investment. Noted in the article published by McKinsey & Company in 2019, "paying attention to environmental, social, and governance (ESG) concerns do not compromise returns—rather, the opposite." Telkomsel’s implementation of easy and straightforward applications allowed their customer pool to grow significantly, with customers, with "20 percent month-over-month growth." Bain's recommendations in applying a new monitoring system have allowed Bain & Company's client to take a step in leading the ESG sector of its market. Shown by the cases of two companies, the pursuit of ESG values eventually allowed each company to grow substantially. As long-term value creation has now become central to maintaining investors in the market, the pursuit of such values is becoming a significant task for many companies; promoting strong ESG values has become the solution for such need for value creation, with more than 90% of S&P Companies and 70% of Russell 100 companies generating sustainability reports every year. Successful incorporation of the values that companies are recognizing would be a significant task many companies would need to complete for them to flourish in the future.