The pandemic’s catastrophic impact on international trade and investment in a brief span of time is a testament of how unpredictable factors can tilt world markets. The post-Covid era has introduced companies and investors to a new dimension of corporate assessment, the environmental, social, and corporate governance (ESG) factor.[1] As companies are becoming increasingly concerned with the impact they leave on the environment and society, ESG is no longer viewed solely from the perspective of climate change and carbon reduction. Further, with companies looking forward to capturing markets in this new race for power, the need for a holistic approach is more prominent.
The United Nations Framework Convention on Climate Change (UNFCCC) recently conducted its 26th conference, the COP26, in Glasgow in October 2021.[2] This year’s COP26 summit discussed responsible financing, with a particular emphasis on harnessing public and private capital inflows to strengthen economic robustness through environment protection and integration. Specifically, one of COP26’s four aims is the mobilization of the public and private sector in finance to accomplish global net-zero emissions.
Additionally, several companies are placing a growing focus on the mitigation of environmental issues as a result of climate-friendly regulatory frameworks, limited supply of resources, and international patterns toward energy conservation. Moreover, concerns about employee wellness and welfare, social sustainability, and promotional strategies have raised awareness of how a business maintains its social capital.
Corporate restructuring is motivated by the desire to alter a company’s organizational framework or operational model, or with the idea of making financial alterations to the firm’s assets and obligations. There are numerous benefits to restructuring a firm, just as there are numerous reasons for a corporation to reorganize. Potential financial benefits include reviving a struggling business, improving the value of a company, and preparing it for sale or transfer to the next generation. Additional perks include acquiring a competitive edge, such as facilitating a company to create a position for rapid expansion or aiding the acquisition of newer ventures. The cumulative advantages of corporate restructuring, on the other hand, can be summed up in two words: preservation and prosperity.
Assessing relevant ESG considerations makes businesses more attractive to investors, improves their ability to obtain funding, and increases the overall value creation of the business – all of which is integral to any company that has just undergone or plans to undergo restructuring. This not only helps if the entire company wishes to undergo restructuring, but also in the case of operational restructuring where a part of the business is cut off and its assets are sold. Hence, it is necessary for companies to understand that investment firms or lenders who gives importance to ESG due diligence requirements look favorably upon companies that adhere to ESG compliance.
In October 2019, America woke up to one of its biggest disasters, the Kincade Wildfire.[3] It was reported[4] by the California Department of Fire that this fire was caused by Pacific Gas & Electric transmission lines, soon after which, PG&E filed for bankruptcy[5] in light of the potential damage caused due to the fire. Inherent Group stepped in to save the company and invested in PG&E in the hopes that the business and its regulator would strike a deal on how to divide the costs of previous and any prospective wildfires. By connecting remuneration policy to wildfire protection and mitigation goals, restructuring corporate governance ethos with enhanced resilience, and accelerating reimbursement procedures for victims, Inherent Group envisioned such a partnership so as to provide societal benefit. There has been a drastic improvement in PG&E’s environmental risk mitigation strategies since Inherent’s investment in its portfolio, which has aided the profitability of the company.
In the United States, an increasing focus on ESG issues has resulted in voluntary, market-driven answers rather than additional legislation. In May 2021, President Biden issued a directive mandating that the federal government analyze all climate risks in company operations.[6] The SEC is also reviewing compulsory climate based and other ESG compliances in public companies, with comments on each review. On this note, the SEC has also set up a task force that focuses on ESG compliance.[7]
Presently, the United Kingdom has no overarching provision or legislation that covers all ESG aspects. But even so, relying on company size, industry, and area, organizations must adhere to a variety of standards addressing numerous components of ESG. Meanwhile, in accordance with the Task Force on Climate-related Financial Disclosure, the British government has suggested compulsory ESG monitoring.[8] All private businesses and LLPs with over 500 employees and a revenue over £500 million, as well as all publicly traded businesses in the UK, will be required to submit ESG data starting in 2022.
Meanwhile in India, for the leading 1,000 listed firms by share value, new ESG reporting standards have been implemented. For example, three major corporations, Vedanta Ltd,[9] Reliance Industries Ltd,[10] and JSW Steel[11] have turned their focus towards ESG factors. Further, the Securities and Exchange Board of India (SEBI) mandates that the information be disclosed in a new format called the Business Responsibility and Sustainability Report (BRSR).[12] For FY 2021-22, BRSR disclosures will be optional, but from FY 2022-23, it will be compulsory. India stated its goal of attaining net zero emissions by 2070 and 500 GW of non-fossil fuel power capacity by 2030 during the COP26 session.[13] In 2021 itself, India’s renewable energy generation has surpassed 100 GW, excluding huge hydroelectric facilities. Many Indian corporations have stated their desire to be net zero by 2035-2050, but this will require a more aggressive strategy than carbon neutrality, which allows for offsetting purchases. The most difficult problem will be not only gaining access to equipment, but also obtaining it at a reasonable rate.
When companies undergo restructuring, they are mostly looking for ways to amend previous corporate practices which would allow them to attract higher investments and perform better in the market. However, looking at the increasing importance that investors are placing on ESG compliance, it would become necessary for companies to include certain ESG checklists while rebuilding themselves. It can be difficult to navigate ESG – which includes regulatory, financial, technical, and social elements – because there is no “one size fits all” strategy. Focusing on overarching operational topics, such as drives or incentives, as well as stakeholder demands and targets, can aid in the formulation of a strategic plan.
Other than the well-established notion that ESG friendly corporate practices are crucial for sustainable financial development of nations, it also unlocks a seemingly unchartered growth potential for companies. Taking up ESG practices will open a newly restructured firm to a plethora of benefits:
- Diverse Investments: Large- and small-scale investors are putting large sums of money into companies that are engaged in governing and operating in a financially viable and responsible fashion. Many financial institutions are already using ESG assessments in their portfolio risk assessments, indicating that funding will be given to companies that have solid ESG strategies and initiatives.
- Skilled Workforce: Younger generations consider whether the organizations they work for share their ESG values, and thus, they ensure that these companies give high importance to sustainable practices. They look forward to working in organizations that are willing to give back to the society. Individuals who are enthusiastic about the business, who are dedicated, and who feel valued contribute to the good will of the business and boosts economic output.
- Competitive Advantage: Businesses that understand the need of adjusting to evolving societal and environmental situations are better positioned to spot business prospects and handle competitive pressure. ESG policies that are comprehensive and inclusive might help a business gain a competitive advantage over its competitors. Management that works to improve employment conditions, diversify their workforce, help communities, and advocate for environmentally responsible policies help to better the image of the company in the market.
A company that has had to restructure its corporate strategy in order to ensure its long-term viability and relevance will need to shift quickly if it is to meet the new strategic goals. In any case, firms must properly monitor ESG results by integrating ESG into their strategy, changing to accomplish the necessary change, and with proper documentation. There is a rising understanding of the risks that must be addressed and controlled, as well as the enormous potential presented by the size of the transition society is currently through.
ESG is more than just a duty. It’s a philosophy of thought as well as a prospect for development. Proactively understanding and engaging factors of ESG has already become quite important. The interlinkage between value creation and ESG compliance is well established. Future trends must be taken into account, and this should encompass transformative development that might have a substantial impact on a company’s prospective revenue or even survival. Research indicates that ESG is becoming increasingly important. Its labels, modes of operation, and accountability systems may vary, but one thing stays constant: ESG has established a standard in the realm of corporate compliance, and it is here to stay.
[1] Harvard Business Review, https://hbr.org/2020/09/social-impact-efforts-that-create-real-value (last visited on January 19, 2022).
[2] United Nations Framework Convention on Climate Change, https://unfccc.int/conference/glasgow-climate-change-conference-october-november-2021 (last visited on December 29, 2021).
[3] California Fire, https://www.fire.ca.gov/incidents/2019/10/23/kincade-fire/ (last visited on December 29, 2021).
[4] USA Today, https://www.usatoday.com/story/news/nation/2019/10/25/pge-broken-wire-near-kincade-sonoma-county-fire-started/2455668001/ (last visited on December 29, 2021).
[5] California Public Utilities Commission, https://www.cpuc.ca.gov/industries-and-topics/pge/pge-bankruptcy (last visited on December 29, 2021).
[6] White House, https://www.whitehouse.gov/briefing-room/presidential-actions/2021/05/20/executive-order-on-climate-related-financial-risk/, Published on May 20, 2021 (last visited on January 01, 2021).
[7] US Securities and Exchange Commission, https://www.sec.gov/news/press-release/2021-42, Published on March 04, 2021 (last visited on January 01, 2021).
[8] Department for Business, Energy & Industrial Strategy, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/972422/Consultation_on_BEIS_mandatory_climate-related_disclosure_requirements.pdf (last visited on January 02, 2021).
[9] Business Standard, https://www.business-standard.com/article/companies/vedanta-mulls-group-restructuring-separate-listing-of-businesses-121111700864_1.html (last visited on January 02, 2021).
[10] Economic Times, https://economictimes.indiatimes.com/markets/stocks/news/takeaways-ril-woos-2-trillion-esg-crowd-with-ambitious-green-energy-plan/articleshow/83808992.cms?from=mdr (last visited on January 02, 2021).
[11] Money Control, https://www.moneycontrol.com/news/business/jsw-steels-seshagiri-rao-on-esg-and-why-it-is-important-for-investors-6401121.html (last visited on January 02, 2021).
[12] Securities and Exchange Board of India, https://www.sebi.gov.in/legal/circulars/may-2021/business-responsibility-and-sustainability-reporting-by-listed-entities_50096.html (last visited on January 02, 2021).
[13] Hindustan Times, https://www.hindustantimes.com/environment/cop26-india-net-zero-target-climate-action-carbon-emmissions-clean-energy-101636034405761.html (last visited on January 02, 2021).
