Traditionally, Management and finance gurus taught us that the purpose of a company is to maximise returns on the investment, resulting in a culture where managers focused exclusively on improving revenue, profits and efficiency even when it meant damage to the environment, displacement of the societies and exploitation of the employees. 

The information Economy has changed the landscape. The end customers have risen today to reward the companies that maximize the collective gain and punish those that do business at the cost of environment and society. Lawsuits have been filed against companies whose actions have caused damages. Some of them have ended up paying billions of dollars in settlements.  

Shareholders are becoming aware of the changing landscape and want their managers to take adequate ESG actions. Despite best intentions, a manager may not take the required action because of the unavailability of the data about the return on the investment or factors outside his control.

Increasing greenhouse emissions causing rise in global atmospheric temperatures are melting glaciers and causing rise in the sea level with the threat to terrestrial life and man made structures. Heat has resulted in changing patterns of wildfires, killing people, destroying properties and disrupting economies. It has also resulted in decrease of the overall efficiency of the workers on the ground. Changing climate patterns have also led to typhoons that result in destruction of infrastructure and loss of life. With end customer becoming aware of the future consequences of global warming, it is willing to avoid the usage of hydrocarbons and move to renewable energy, even if it entails paying more for it. Governments are planning to introduce carbon taxes that will eventually make it costlier to use hydrocarbons. 

Particle emission from power plants, factories and locomotives cause respiratory diseases and lung cancer. Nitrogen emission reduces agriculture yields and causes childhood stunting. Plastic and other contaminants in oceans recycle for human consumption. With goverments regulating air and water pollution, there is increasing risk of lawsuits and penalties againts the polluters.  

Social issues such as pay inequality, working conditions of the employees, constitution of the workforce, child labour, inappropriate or inadequately tested products,  pollution or an incidence of bribery can severely compromise the reputation of a company. End customers favour companies and brands with better social record and avoid those whose actions harm their societies. 

It is a proven fact that proud employees are more productive and better brand managers than those that hide. We all know that better community relations lead to better business environment that better manages inevitable conflicts. If you do good, you will be conceived good in the communities where you work and sell. Your customer knows more than what you communicate about your brand. Bad news spreads faster. 

Given the changing landscape, Governance is of absolute importance. Company policies should clearly define ESG responsibilities inline with existing and expected regulations. Managers should  maximize overall value for all the stakeholders. Maintaining an ESG risk register can help. It is important to encourage employees and managers to identify and highlight ESG risks. 

A firm's actions related to environment and society impact its long term financial performance. With little data available, it is almost impossible to calculate return on investment. The value lies in a more complex system of stakeholder relations. It may be a good practice for a company to reinvest a percentage of its profits to improve its ESG reputation. There are strategic choices to be made but ESG is the future.