Environmental, Social, and Governance (ESG) is no longer just a “good-to-have” framework. It is now a necessary strategy for businesses today, especially in the fast-paced digital landscape in which more companies emphasize sustainability practices.
It was coined in 2005 by the International Finance Corporation (IFC) in their “Who Cares Wins” publication. The ESG framework is a powerful catalyst for driving societal equity and helping businesses gain an edge over the competition. Following ESG guidelines will enable companies to boost their value and stimulate innovative growth.
The East Ventures – Digital Competitiveness Index (EV-DCI) 2023 report noted that implementing ESG principles can advance equitable access to digital resources, especially in tier 2 and tier 3 areas in Indonesia that need more significant support.
The government and private sectors can collaborate on ESG programs to expand internet access through the equitable development of communication infrastructure to frontier regions or 3T areas (foremost, outermost, and underdeveloped) and the establishment of more extensive internet networks.
Companies in all sectors can play a crucial role in supporting and driving regional digitalization through their ESG program. For example, fintech platforms contribute in promoting financial literacy, increasing service inclusion to tier 2 and 3 cities, and presenting a more equitable economy, as evidenced by the rise of peer-to-peer lending programs and the widespread use of e-wallets.
Edtech platforms, such as Ruangguru, are leveraging their services on 3T areas, particularly tier 3, in order to offer students an adequate education. Meanwhile, healthtech adoption has increased rapidly due to the urgent need during the pandemic.
Unlocking competitive advantage through ESG implementation
The EV-DCI 2023 report also highlights that implementing ESG principles helps create a harmonious balance between sustainability and profitability. Many startups cleverly incorporate these principles with their economic objectives, balancing environmental preservation and business growth.
Here are several compelling advantages that come with implementing ESG practices:
Companies prioritizing ESG principles are better equipped to mitigate risks, such as regulatory fines, consumer boycotts, and reputational damage. For example, AI implementation by cybersecurity companies promotes better security for data, reducing the risk of data breaches and associated fines.
- Driving investor interest
Investors increasingly consider ESG implementation when making investment decisions. For instance, East Ventures has actively engaged its portfolios to implement ESG frameworks and invested in startups that apply ESG frameworks as part of its commitment to the signatory of the Principles of Responsible Investment (PRI).
ESG-focused businesses are seen as more sustainable and less risky, making them more appealing investment opportunities in the region. According to the International Finance Corporation (IFC), investment opportunities in the green and climate-related sectors are estimated to exceed a staggering US$23 trillion.
- Enhance companies’ reputation
Consumers, employees, and the public increasingly prefer businesses that reflect their values, such as those related to environmental and social issues. E-commerce enabler companies like SIRCLO have made strides in community economic empowerment through MSMEs and women entrepreneurs, thus improving their brand image and attracting more consumers.
- Improve operational efficiency
ESG-focused companies are innovative and seek ways to minimize their environmental footprint, meet social responsibilities, as well as improve governance. For instance, GoTo and Grab have adopted electric vehicles, reducing negative environmental impacts and leading to greater efficiency and cost savings. Sociolla reduces plastic waste by using eco-friendly packaging and collecting used skincare bottles to be recycled. These companies contribute to ESG’s environmental pillar and enhance operational efficiency and profitability.
Pathways to strengthen ESG practices
Although Indonesia’s Financial Authority (OJK) and the Ministry of Environment and Forestry of the Republic of Indonesia (KLHK) introduced the idea of embracing ESG principles back in 2014, many Indonesian businesses still find it challenging to understand and integrate these principles. The main hurdle is the limited access to and references for ESG measurement, making it difficult for these companies to incorporate ESG practices into their operations. Only around 52% of 190 listed companies have successfully applied ESG practices.
Here’s a simplified guide to kick-starting your ESG practices:
- Establish rules and procedures for ESG within your company.
- Assemble a dedicated team to oversee your ESG efforts and measurements.
- Regularly generate ESG reports in line with national framework requirements.
In general, all stakeholders must play a proactive role in implementing ESG in digital ecosystems. The government can incentivize business actors who have embraced ESG, investors can provide funding requirements, and consumer demand for sustainability-based products can motivate startups to build ESG-compliant solutions. This collaborative effort is crucial for effectively integrating ESG principles across industries.
Download the EV-DCI 2023 report here.