Global ESG and Sustainability Consulting Market

• Vikas Kumar
• February 28, 2024
• ENERGY & POWER, NEWS
• business strategy, ESG, ESG metrics, ESG strategies, India ESG and Sustainability Consulting, Sustainability, Sustainability consulting, Sustainable finance
• 0 Comments

ESG Overview

ESG stands for Environmental, Social, and Governance. It is a generic term for evaluating corporate behavior and is nowadays used interchangeably with sustainable, responsible, impact, or ethical investment.

• These are the three pillars that are utilized to measure the sustainability and ethical impact of an investment. The term ESG was coined in 2004 by the former UN Secretary-General Kofi Annan.
• These non-financial aspects are widely adopted by investors in their analytical processes to characterize threats as well as growth prospects. It looks beyond the typical financial statement and tries to evaluate a company’s impact on its various stakeholders, including employees, customers, and communities in which it operates.
• It may be viewed as a successor to Socially Responsible Investment (SRI), which is gaining popularity worldwide. But unlike SRI, which relies on negative screening, ESG propounds an underlying philosophy of larger good without overlooking financial or economic viability.

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“E” refers to environmental factors. This includes issues related to climate change, greenhouse gas emissions, pollution, natural resource depletion, and other environmental risks and opportunities that can affect a company’s performance and sustainability. This component of ESG covers how the business interacts with the natural environment, the environmental impacts of its operations, and the actions the company takes to mitigate the negative effects, such as climate change, resource depletion, waste, pollution, deforestation and biodiversity

“S” refers to “Social. Socially responsible companies are those that strive to balance their financial goals with their impact on people and society as a whole. Investors who prioritize social responsibility look for companies that demonstrate a commitment to ethical and responsible behavior in their social practices. A social score also rises if a company is well integrated with its local community and therefore has a ‘social license’ to operate with consent

“G” refers to Governance. Governance refers to the system of rules, practices, and processes by which a company is directed and controlled. Good governance ensures that a company is managed in a responsible and ethical manner, and that it takes into account the interests of all stakeholders, including shareholders, employees, customers, suppliers, and the broader society. Factors that are typically considered in assessing a company’s governance include the composition and independence of the board of directors, executive compensation practices, the quality and transparency of financial reporting, and the company’s policies on issues such as bribery, corruption, and political contributions

The state of the ESG and Sustainability consulting market

The rising worry around maintainability and environmental change has speed up the turn of events and execution of ESG rehearses in enterprises. Associations have now to go with the right business choices and oversee ecological gamble and effect. Despite the fact that ESG is turning into a need for some associations, organizations are not prepared to integrate it into their business. Luckily, the ESG consultancy area is developing quickly, and it is rolling out a positive improvement by putting ESG at the focal point of organizations’ business methodologies.

Sustainability consulting is an increasingly important service in the world, with market spending set to nearly double over the next five years. With increasing pressure from investors, consumers, regulators, and a desire to explore market opportunities, companies are integrating environmental, social, and governance (ESG) considerations into their operations.  Many governments are setting ambitious targets to reduce carbon emissions and move towards a greener, circular economy, and the financial world is encouraging companies to be more transparent and focus on their ESG performance.

In an effort to meet the ever-changing requirements of a variety of clientele, professional service firms and consultancies are constantly expanding their portfolios to include advisory services, such as sustainability capabilities. To meet demand from customers in their core sectors, engineering and infrastructure consultancies are expanding their sustainability and environmental, social, and governance (ESG) capabilities. Worldwide supportability consultancies are adding both capacity and geographic presence in a solidification procedure that focuses on trained professional, higher worth and higher edge administrations contrasted with ESG counseling suppliers. Overall, ESG AuM is expected to grow up to 36.6% CAGR between 2015 and 2026. Whilst Europe is the most mature region (54% of 2026 total), the US is fast catching up (34% of 2026 total)

An ESG and sustainability focus creates value

Five of the core value drivers for investing in sustainability and ESG strategy to ensure that it generates more than just lip service

Key Drivers & Trends in the ESG Consulting Industry

Internal & External Pressures: Pressure from investors, consumers, regulators and other stakeholders is driving the prioritisation of Sustainability & ESG strategies. Structural factors are creating a necessity to implement sustainable operations to ensure resilience and longevity. Regulatory pressures such as sustainability reporting and carbon emissions targets are driving demand as companies look to comply with a changing landscape

Targeted Capital Allocation: Sustainable finance and the ESG agenda are now key decision making criteria for asset managers in allocating funds and investments “Impact” or “Purpose” investing is increasing year on year, with over 25% of European AuM forecast to be allocated to ESG funds by 2025. Firms active in improving their ESG measures are increasingly attractive to investors, some funds targeting ESG allocations

Increasingly Senior Engagement: Sustainability consulting engagements are increasingly being led by senior executives, indicating a growing recognition of the importance of sustainability at the highest levels of organisations. This trend towards seniority can be seen across a range of sustainability-related initiatives, from climate change mitigation to social impact. It means that consultants are increasingly engaging with senior decision-makers and must have a deep understanding of business strategy, operations, and governance. Consultants must also be able to communicate sustainability issues in a language that resonates with executives and must be able to connect sustainability initiatives to broader business objectives

Integration of ESG Factors in Decision-Making: Companies were integrating ESG considerations into their decision-making processes. This included not only financial considerations but also environmental and social factors, reflecting a broader perspective on business operations.

Technology and Innovation: Advancements in technology were playing a crucial role in monitoring and reporting ESG metrics. Companies were utilizing technologies such as big data analytics, artificial intelligence, and blockchain to enhance transparency and traceability in their sustainability efforts.

Regulatory Compliance Support: With an increasing number of governments and regulatory bodies mandating or encouraging ESG reporting, consulting firms were assisting clients in navigating complex regulatory landscapes. This included ensuring compliance with disclosure requirements and helping companies establish robust reporting frameworks

Growing Interest in the Broader Sustainability Ecosystem: Interest in sustainability consulting has extended beyond traditional corporate sustainability metrics, such as energy efficiency and carbon emissions. There is an increasing focus on the broader sustainability ecosystem, which encompasses a variety of actors, such as industry, academia, and NGOs. This trend is being driven by an increasing recognition that achieving sustainability goals requires a co-creative, collaborative approach that engages a broad range of stakeholders.

Building Capacity: The growing demand for sustainability consulting services has created a need for consulting firms to expand their capacity. Two primary methods of capacity-building that have emerged in the industry are hiring and acquisitions. As the demand for sustainability consulting services continues to increase, consulting firms must expand their capacity to deliver these services to clients. Capacity-building can be achieved through various methods, such as hiring additional staff or acquiring other companies with complementary expertise

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Challenges in the ESG Consulting Industry

Lack of Standardization: There is a lack of standardized metrics and reporting frameworks globally. Different regions and industries may have varying expectations for ESG reporting, making it challenging to create a universally accepted set of standards.

Data Quality and Availability: Collecting accurate and reliable ESG data can be challenging. Many companies face issues with data availability, consistency, and transparency. Without reliable data, consultants may struggle to provide meaningful insights

Integration into Business Strategy: Ensuring that ESG considerations are integrated seamlessly into the overall business strategy can be a significant challenge. Consultants may face resistance from companies that view ESG initiatives as separate from core business operations.

Greenwashing Concerns: Greenwashing, or the practice of presenting a misleading impression of a company’s environmental or social impact, remains a concern. Consultants need to help clients demonstrate genuine commitment to ESG rather than engaging in superficial practices for marketing purposes.

Capacity Building: Many organizations lack the internal expertise to navigate the complexities of ESG and sustainability. Consultants may need to focus on capacity building within client organizations to ensure long-term success.

Costs and ROI Uncertainty: Some companies may perceive ESG initiatives as costly without clear immediate returns. Consultants may need to articulate the long-term benefits and help clients understand the potential return on investment.

Supply Chain Challenges: Managing and improving sustainability across global supply chains is often challenging. Consultants may need to address issues related to supply chain transparency, responsible sourcing, and environmental impact assessments.

Cultural and Regional Differences: ESG priorities and concerns may vary across different cultures and regions. Consultants must be sensitive to these differences and tailor their strategies accordingly.

Conclusion

As sustainability becomes an increasingly important consideration for companies navigating complex societal megatrends, sustainability consulting is becoming more integral to their operations. The growth and development of the sustainability consulting industry over the past five years have revealed major trends. The industry has proven to be recession-proof, indicating its importance to companies even during challenging economic periods of time. Engagements are becoming more senior, indicating that companies are taking sustainability more seriously and are investing more heavily. Sustainability consulting firms are building capacity through both hiring and acquiring other companies, enabling them to meet growing demand

These trends reflect a growing recognition of the importance of sustainability among companies, as well as the increasing complexity of sustainability challenges, that impact the value chain of all organisations. As such, sustainability consulting is set to remain an essential service for companies seeking to navigate this complex landscape. With the industry continuing to evolve, it will be interesting to see how sustainability consulting firms adapt and respond to these trends in the years to come.