Infrastructure projects are complex by nature. These projects involve large investments and often outlive their decision-makers. Investors are always looking for ways they can evaluate their decisions. They seek to find ways to evaluate factors that could have an impact on a project in the future and the future. Before making any investment decision, they take into consideration any disruptive future event that could impact the profitability or even the existence of any company.
Investors use ESG (Environmental, Social and Governance) to make investment decisions regarding a project. ESG emerged in the 1990s, when sustainability was gaining momentum. It is based upon the belief that organisations should not only focus on profit but also on people and the environment for long-term sustainability and profitability.
ESG can be viewed as an extension of corporate social responsibilities. It considers how an organisation treats society and its people as well as the environment. ESG is also affected by the structure of a company, and especially its top management. Modern investors are increasingly considering ESG when evaluating the risk associated with investing in a company, or project. Infrastructure projects have a direct impact on society and the environment. They are expensive and often have a very long life cycle. ESG is crucial for infrastructure projects.
Environment factor
Modern society is aware of the future and current environmental conditions. Future generations are expected be more conscious and concerned about their environment. The infrastructure companies must not only think about the present but also look to the future. Climate change can also have a negative impact on the performance or existence of any project. A project near the ocean shore could become submerged due to rising sea levels 50 years later. Another risk to the environment could be the loss of or scarcity in a critical resource for the project’s continued success. Real estate projects could be ruined if there is not enough fresh water.
Other factors, such as pollution or waste generation, could cause serious problems for the projects. One of the many factors that could impact a pollution- or waste-generating project is loss of reputation, resistance from local communities, or legal action by government.
Social factor
Every infrastructure project is designed for the benefit of society. Every project is evaluated for risk by infrastructure finance. New age and institutional financiers believe that the success or failure of any project is dependent on how it treats society, the people who work for them, and how much value it creates.
Modern business is more than just about making money. It must also give back to society what they have taken. Social groups are becoming increasingly conscious of the value that any project will bring to society. If the project does not create value for society, there is a risk of community resistance or even a boycott. While this might not be a problem in the short term, it can occur in the long-term. To avoid public scrutiny, it is important to consider the social factors that govern any project from the beginning.
Governance Factor
Effective management is crucial in today’s dynamic economic environment. It could make all the difference in whether an organisation or project succeeds or fails. ESG requires a diverse, impartial, and gender-balanced management system, especially when it concerns higher management or the board. ESG also considers the competence and experience that the board of directors. Transparency in reporting systems and business ethics are becoming increasingly important. Governance in ESG also includes the remuneration paid to senior management and employees. ESG also considers the long-term value creation of infrastructure projects, which have long service periods.
Conclusion
ESG can be seen as an extension of corporate social responsibilities, as we have already mentioned. While ESG is still in its infancy in India, it is an important component of risk analysis for projects in developed countries. ESG awareness is rapidly growing in India. It could also be a key factor for Indian corporations very soon. To attract investments, the ESG component must be taken seriously.
Disclaimer
The views expressed above are those of the author.
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