Sustainability Drives the Future of BusinessesBy María José Goytia | Wed, 09/07/2022 - 17:15
Many would argue that the capitalist business model has fostered economic growth and created wealth. However, it has also brought environmental damage and degraded social inequalities. The growing effects of climate change prove the need to rethink our economic dynamics and redesign them toward fairer and more environmentally friendly schemes that can be measured through environmental, social and governance (ESG) criteria, industry experts said.
Sustainable and responsible investment has gained global relevance in recent years. "ESG criteria have become an investment benchmark for business development," said Érika Santiago, Senior Manager of External Affairs Communication and Sustainability, AES Mexico.
The ESG vision aims to nurture a cohesive approach to business development, in which economic profitability must go together with environmental, social and governance issues. "Incorporating environmental, social and governance responsibility must become part of companies' core business," explained Jorge Radi, Head of Commercialization and Trading, Enel.
ESG investments are transforming the business models of companies, driving them to become more responsible regarding society and the environment. In 1Q21 alone, more than US$21 billion was allocated to global investment funds based on ESG criteria, proving the attractiveness of developing such strategies.
For companies, the main driver has been the financial sector. Through its investment and capital injection policies, companies have had to increase their ESG commitments. Many investment funds are entirely abandoning investments that harm the environment or are socially irresponsible. This means that if companies are to access capital, they must prove their commitment to sustainable business models.
Another major driver has been the regulatory change pushed by international commitments to combat climate change, developing a double-incentive system in which sustainable practices are encouraged and environmentally damaging practices are punished. The resilience companies gain by adopting ESG best practices add further value for businesses.
"ESG is an inevitable path for everyone. There is no other way to look at the future of business without considering its impact on the environment in which it operates," said Sergio Carey, Finance Director, Siemens Energy Latin America.
In addition, consumers are becoming increasingly aware of their purchasing decisions and how their consumption habits impact their environment. Therefore, they choose to buy from companies that align with their sustainability values.
Market studies have shown that consumers, especially the younger ones, trust companies that made their operations transparent and disclose their sustainability strategies. This has also led to an increase in accountability reporting to comply with sustainability commitments. Therefore, ESG strategies must be measurable.
To make their results transparent, companies are often resorting to international standards to produce their sustainability reports. However, due to the variety of standards that exist, comparisons between sustainability achievements are difficult. "There are initiatives that seek to standardize sustainability reporting to facilitate measurement and comparison between different agents and facilitate data transparency in these processes," explained Ruth Guevara, Partner and Leader for Climate Change and Sustainability Solutions, EY.
In addition, companies obtain many more benefits in the long term by investing in ESG strategies, outweighing the costs required to implement them. "Joint investment in efficiency, sustainability and well-being is the best long-term decision to reduce costs and increase productivity," noted Carey.
Likewise, the drive to reduce costs and increase sustainability leads companies to innovate, which allows for greater competitiveness in the long term. It is also through this innovation that industries become more resilient to the challenges of the future, Radi added.
The risks of avoiding implementing ESG measures are increasing at a rapid pace. As time progresses, the financial costs of migrating to sustainable strategies will increase depending on the lack of adaptation. In addition, failure to meet community-accepted ESG criteria can result in fines, increased production and operating costs and more expensive investments. There are also indirect costs such as reputational risks that can be much more damaging than direct costs.
Engaging the communities where companies operate is critical to improving ESG policies. "Businesses must promote social welfare in their environment," explained Katia Bernal, CEO of Citrus. In addition, "ESG requirements go beyond the company's internal operation and management; these requirements must be extended to suppliers and customers, which will allow us to redesign production chains in favor of a more responsible and sustainable economic system," noted Carey.
So far, the private sector in Mexico has done the most to foster ESG approaches. "Ultimately, the drive toward sustainability has come from the private sector rather than from the political leadership in power," said Bernal. To drive the development of sustainable businesses, collaboration between the public and private sectors is essential, however. Governments must modify their laws and regulations to sanction bad practices and implement positive incentives to encourage industries to implement ESG strategies.
It is in this leadership role that energy companies are spearheading the migration toward more sustainable economic dynamics, since energy is an integrated input in all value chains. This has positioned energy measures as one first ESG actions to be implemented.
"Energy is a human right, the energy industry must always contribute to this issue. Implementing ESG strategies is one way in which the energy industry can contribute to this right being exercised at all levels of society," said Bernal. Therefore, the energy sector should focus on resilience and implement strategies that promote clean, reliable and accessible energy as soon as possible.
The concept of sustainability implies building a business that is sustainable in the long term. "This should be the best incentive for companies to adapt to new market demands in favor of environmentally sustainable and socially responsible models," noted Guevara.
"Although complying with ESG criteria is currently seen as a formality, in the future it will become part of the overall business vision. Companies that do not comply will cease to exist," Carey concluded.