The contemporary business landscape has undergone a profound transformation. No longer are organisations judged solely on their financial performance; instead, stakeholders increasingly scrutinise how companies impact the environment, treat their workforce, and govern their operations. This paradigm shift has positioned Environmental, Social, and Governance (ESG) considerations at the heart of modern business strategy, transforming from a mere compliance exercise into a fundamental driver of competitive advantage and sustainable growth.
The Evolution of ESG in Business
The concept of ESG emerged in 2004 through a landmark United Nations report, but it wasn’t until the late 2010s and into the 2020s that ESG evolved from a reactive, perception-driven movement into a proactive strategic imperative. Today, global ESG assets are projected to exceed $53 trillion by 2025, representing more than one-third of total assets under management worldwide. This astronomical growth underscores a fundamental truth: ESG is no longer optional, it has become essential for long-term business viability.
In Indonesia, this shift has been codified through robust regulatory frameworks. The Environmental Protection and Management Law (UU No. 32/2009) establishes the foundation for environmental responsibility, whilst the Financial Services Authority (OJK) Regulation No. 51/2017 mandates sustainable finance implementation across financial institutions, issuers, and public companies. These regulations obligate businesses to integrate ESG principles systematically, including submitting Sustainable Finance Action Plans and publishing Sustainability Reports.
What is ESG?
ESG practices are considered the future of business. Investing in ESG is quite popular, with investors increasingly seeking companies committed to the cause and responsible for how they run their business. Learn more about the three pillars of ESG.
Environmental
The environmental pillar considers how a company impacts the environment. This means how your businesses handle factors such as pollution reduction, resource management, and climate change mitigation.
Social
The social aspect focuses on how a company interacts with its stakeholders, including employees, suppliers, vendors, and the community. It involves ensuring fair labour practices, disseminating inclusivity, and giving back to the community.
Governance
Talking about governance, it refers to a company’s internal management and practices. This particular pillar must show transparency, accountability, and adherence to ethical business principles.
Understanding the Three Pillars of ESG
Environmental Pillar
The environmental dimension addresses how organisations manage their ecological footprint. This encompasses carbon emissions management, energy efficiency, waste reduction, biodiversity conservation, and sustainable resource utilisation. Companies demonstrating environmental leadership not only contribute to climate change mitigation but also achieve significant operational efficiencies. Research indicates that environmental sustainability initiatives often drive cost reductions through better resource management policies, with companies achieving substantial savings on utility bills whilst simultaneously reducing their carbon footprint.
Social Pillar
The social aspect focuses on human capital and stakeholder relationships, encompassing fair labour practices, workplace diversity and inclusion, employee health and safety, community engagement, and human rights protection. Progressive social practices create tangible business value: organisations with robust ESG strategies experience 21% higher employee productivity and 41% lower absenteeism compared to their peers. Furthermore, 65% of employees demonstrate increased engagement when they believe their employer is socially and environmentally responsible, whilst 75% of millennials would accept a pay reduction to work for a socially responsible company.
Governance Pillar
Governance encompasses corporate leadership structures, board oversight, transparency in reporting, ethical business practices, anti-corruption policies, and stakeholder accountability. Strong governance reduces social and governance risks whilst improving decision-making quality. Companies with diverse boards demonstrate better risk mitigation and greater innovation capacity, strengthening their competitive positioning in increasingly complex markets.
The Strategic Value of ESG: Quantifiable Returns
Enhanced Financial Performance
The financial case for ESG integration is compelling and empirically validated. Between 2013 and 2020, companies consistently scoring high on ESG factors achieved 2.6 times greater shareholder returns than average scorers. More recent evidence reveals that ESG leaders globally earn an average annual return of 12.9%, compared to 8.6% for laggard companies, representing approximately a 50% premium in relative performance.
Research analysing over 1,000 peer-reviewed papers found that 58% of corporate ESG efforts correlate with improved financial performance, particularly when initiatives are material and strategic. A five-point reduction in ESG risk score has been linked to an annual increase of nearly 1% in excess returns, adjusted for market conditions. Even more striking, companies demonstrating ESG score improvements over time experience up to 1.8 times increase in enterprise value-to-EBITDA multiples, significantly higher than the 1.2 times increase associated with static high scores.
Operational Efficiency and Cost Reduction
Implementing ESG strategies generates substantial cost savings through multiple channels. Addressing raw materials consumption, optimising water usage, reducing carbon emissions, and streamlining operational expenses can significantly improve profitability. Companies with sustainable supply chains outperform others financially, enjoying higher margins and enhanced operational resilience. EcoVadis and Bain research analysing nearly 100,000 companies found that firms in the top quartile for executive gender diversity grew revenues approximately two percentage points faster and delivered three percentage points higher EBITDA margins than peers.
Sustainable supply chain practices yield margins three to four points above average, whilst organisations with high employee satisfaction achieve five-point higher three-year revenue growth and margins up to six points greater. These efficiency gains stem from better resource management, reduced waste, optimised logistics, and innovation-driven process improvements.
Access to Capital and Investment Attractiveness
ESG performance has become a critical determinant of investment decisions and capital access. Companies with robust ESG practices benefit from lower cost of capital, recent evidence links higher ESG scores to a 10% reduction in capital costs. MSCI research confirms that organisations with stronger ESG characteristics enjoy lower cost of capital and exhibit greater financial resilience.
ESG performance attracts foreign capital inflows and increases foreign ownership, thereby improving stock liquidity. Institutional investors, including foreign investors, consider ESG indices as important investment factors when measuring whether listed companies possess sufficient ESG risk control capability and sustainable profitability. As ESG funds continue expanding their assets under management, companies with sub-par ESG scores risk losing access to this significant capital source.
A 2025 global investor survey revealed that 65% of institutional investors would consider divesting from companies lacking credible ESG disclosures. Conversely, 88% of companies globally now view sustainability as a value creation opportunity, with 65% reporting they are meeting or exceeding their sustainability goals.
Enhanced Market Positioning and Revenue Growth
ESG propositions enable companies to enter new markets and expand within existing ones. Approximately 70% of consumers are willing to pay additional costs for green products, whilst brands garnering more than half their sales from products making ESG-related claims enjoy 32% to 34% repeat purchase rates, significantly higher than the under 30% rates achieved by brands with fewer ESG claims.
Companies with social engagement activities achieve higher valuations. The Business and Sustainable Development Commission estimates that achievement of the UN Sustainable Development Goals could result in at least $12 trillion worth of market opportunities annually for the private sector by 2030, representing approximately 10% of global GDP forecast for that year. These opportunities span multiple sectors including food and agriculture, energy, and health and wellness.
Triple outperformers, companies excelling in growth, profit, and sustainability, increased revenues at a median rate of 11% per year, 1.4 percentage points higher than profitable growth outperformers lagging on ESG. These organisations also exceeded profitable growth peers in median excess total shareholder return by 2.5 percentage points.
Talent Attraction, Retention, and Productivity
ESG excellence significantly impacts workforce dynamics. According to Deloitte, companies with strong ESG strategies experience 25% lower turnover amongst millennial employees, substantially reducing recruitment and training costs. Research from Gallup demonstrates that companies with high ESG scores see 13% higher employee productivity.
Fostering a sense of purpose and promoting positive social impact attracts and retains top-quality employees, leading to higher job satisfaction and enhanced productivity. Organisations that implement effective ESG strategies see a 21% increase in employee productivity. The Edelman Trust Barometer indicates that 71% of employees are more likely to recommend their employer if they believe the company has a positive societal impact.
When employees believe their work environment is sustainable, they report higher engagement and productivity levels. Companies known for their ESG commitments enjoy a significant edge in attracting and retaining top talent, particularly among millennials and Generation Z who now constitute a substantial portion of the workforce.
Brand Reputation and Customer Loyalty
ESG initiatives significantly enhance brand value by differentiating companies from competitors and appealing to socially conscious consumers. Consumers today are more inclined to support brands aligning with their values, creating strong brand loyalty through ethical sourcing, sustainable practices, and community engagement.
ESG management impacts brand loyalty through four primary mechanisms: improving brand image, enhancing consumer trust, satisfying consumers’ social needs, and reducing risks and uncertainties. Companies prioritising ESG issues are perceived as responsible and forward-thinking, building trust crucial for long-term success.
Transparent ESG reporting builds accountability and trust with stakeholders, enhancing corporate reputation. Good ESG performance establishes positive corporate images in capital markets, improving corporate reputation and helping companies achieve long-term value and sustainable development. Sustainability factors have become critical to brand reputation, with brands demonstrating strong sustainability commitments gaining public trust and loyalty, whilst those falling short face increased scrutiny and reputational risks.
Strategic Implementation of ESG
Establishing Governance and Leadership Commitment
Active leadership engagement is crucial for guiding and defining ESG best practices, reinforcing ESG strategy as a top priority. Companies must establish dedicated ESG teams with clear support from C-level executives to ensure ESG isn’t marginalised within the organisation. Board oversight that regularly reviews ESG metrics and ensures compliance with regulatory requirements strengthens accountability.
Conducting Materiality Assessments and Defining Issues
ESG frameworks serve as essential systems to standardise reporting metrics and provide valuable references for identifying key benchmarks. Companies should conduct comprehensive materiality assessments to identify specific environmental, social, and governance factors most relevant to their operations and stakeholders. This process involves evaluating both the impact of ESG factors on the organisation and the organisation’s impact on society and the environment, the concept of double materiality increasingly embedded in regulatory frameworks like the EU’s Corporate Sustainability Reporting Directive.
Setting SMART Objectives
SMART (Specific, Measurable, Achievable, Relevant, and Time-Bound) methods provide companies with clear timelines and facilitate monitoring processes to establish transparent goals. For instance, companies might set goals to reduce greenhouse gas emissions by 20% within five years, achieve zero waste to landfill by a certain date, or increase the proportion of women in leadership positions to 40%. These objectives should align with global standards such as Science Based Targets initiative (SBTi) or UN Sustainable Development Goals.
Integrating ESG into Operations and Culture
Companies can incorporate ESG practices into their organisational culture by training management and employees, ensuring consistency for long-term improvements. Integration involves embedding ESG principles into procurement processes, supply chain management, product development, and daily decision-making at all levels. Incorporating ESG-related KPIs into leadership performance reviews and incentive programmes reinforces accountability.
Implementing Data Collection and Monitoring Systems
Effective ESG strategies require robust data collection, analysis, and reporting mechanisms. Companies should invest in ESG software solutions to streamline data management, automate compliance processes, and enable real-time tracking of performance against defined KPIs. Adopting recognised methodologies like lifecycle assessments, carbon accounting standards, and established frameworks (GRI, SASB, TCFD) ensures data accurately reflects environmental and social impact.
Stakeholder Engagement and Transparent Reporting
Stakeholder engagement is essential for understanding expectations and securing support. Companies should engage stakeholders early in the reporting process through surveys, interviews, focus groups, or public forums to gather diverse perspectives. Regular communication and transparent updates about ESG efforts build trust and demonstrate commitment.
ESG reporting allows companies to measure and showcase progress, boost employee morale by demonstrating impact, and strengthen buy-in for ESG goals. Companies should publish comprehensive sustainability reports adhering to recognised standards, providing both achievements and challenges to maintain credibility.
Overcoming Implementation Challenges
Data Management and Quality
Collecting ESG data often involves multiple reporting frameworks, making standardisation challenging. Many organisations use inconsistent methods and store data in silos, weakening reliability. Solutions include implementing automated systems, centralised platforms, and clear data standards to ensure consistent, high-quality data collection.
Regulatory Compliance and Evolving Standards
ESG-related regulations vary across countries and constantly evolve, making compliance difficult. Over 1,200 ESG regulations have been introduced globally since 2011. Companies should invest in ESG software, align with established standards like GRI or SASB, prepare for audits, and establish dedicated compliance teams to monitor regulatory updates.
Resource Constraints and Expertise Gaps
Implementing ESG strategies requires significant investment of time and resources. Companies may lack necessary skills and knowledge to create and execute successful ESG strategies. Solutions include investing in ESG training, hiring experienced professionals, appointing diverse board members, and leveraging external ESG consultants or advisors.
Stakeholder Alignment and Conflicting Priorities
Balancing needs of various stakeholders can be challenging, with 41% of companies highlighting conflicting ESG requirements as their top short-term challenge. Different groups often have unique expectations requiring tailored approaches. Clear communication, shared goal setting, and transparent engagement with each stakeholder group helps address conflicting priorities.
Avoiding Greenwashing
Companies touting unsubstantiated environmental benefits risk eroding trust. Customers, NGOs, and regulators have become adept at detecting false or inflated claims. Solutions include backing claims with verified data, partnering with reputable certification bodies (Fair Trade, FSC, B Corp), implementing third-party assurance of ESG reports, and ensuring genuine integration of ESG principles rather than superficial marketing.
The Competitive Advantage of ESG
Risk Mitigation and Business Resilience
ESG risk management serves as the backbone of solid business strategy, linking ESG factors with traditional risk aspects to provide comprehensive, risk-based approaches to risk mitigation whilst identifying unexpected opportunities. Companies can reduce exposure to supply chain disruptions caused by environmental disasters or regulatory changes through proactive ESG measures.
Suppliers with weak labour practices or poor environmental controls expose businesses to legal, reputational, and financial risks. ESG-integrated supply chains are better prepared to handle disruptions from regulatory shifts, activist scrutiny, or climate-related shocks. Enhanced supply chain visibility through ESG practices enables companies to stay ahead of compliance requirements, avoiding fines and reputational damage.
Innovation and Market Differentiation
Businesses integrating ESG considerations innovate sustainable products, tap into new markets, and differentiate themselves in increasingly conscious consumer landscapes. Early ESG adopters gain significant competitive edges, with companies committed to ESG principles often seeing growth rates surpassing competitors by at least 20%.
The measures expected to have the biggest impact on value chains and CO₂ reduction are also the biggest drivers for increasing competitiveness, particularly those addressing entire value chains. ESG in value chain transformation helps gain competitive advantage, with 81% of investors viewing ESG among their top five priorities.
Supply Chain Sustainability
Nearly 70% of an organisation’s environmental and social impact lies within its supply chain. Integrating ESG principles into supply chain management offers advantages including risk mitigation, cost savings, regulatory compliance, enhanced reputation, and improved stakeholder relationships. Sustainable supply chain practices can improve resilience to disruptions and uncertainties by identifying alternative sourcing options and implementing responsible risk management strategies.
Leading organisations are rethinking vendor relationships as partnerships, co-developing sustainability goals, sharing data on carbon footprints, and investing in supplier development programmes. Some brands are funding ESG upgrades at smaller suppliers, recognising their own impact depends on the weakest link in the chain.
ESG in Indonesia: Regulatory Context and Opportunities
Indonesia’s ESG framework is anchored in Law No. 32/2009 on Environmental Protection and Management, which obligates businesses to maintain environmental sustainability and comply with environmental quality standards. The Financial Services Authority (OJK) Regulation No. 51/2017 regarding Sustainable Finance implementation requires financial institutions, issuers, and public companies to apply sustainable finance principles in their business activities.
The regulation mandates that covered entities submit Sustainable Finance Action Plans and publish Sustainability Reports. For financial institutions, compliance timelines vary based on total assets, with the largest institutions required to comply by January 2024 and pension funds with assets exceeding one trillion rupiah by January 2025.
Additionally, Law No. 6/2023 on Job Creation addresses employer obligations to ensure fair treatment of workers, whilst Presidential Regulation No. 60/2023 on the National Strategy for Business and Human Rights emphasises corporate responsibilities to respect human rights and provide access to remedy.
This regulatory environment creates both obligations and opportunities for Indonesian businesses. Companies that proactively embrace ESG principles position themselves to attract foreign investment, access green finance mechanisms, and compete effectively in both domestic and international markets, increasingly demanding sustainable practices.
Measuring ESG Success
To establish strong correlation between ESG performance and business value, companies must identify key performance indicators (KPIs) that are both measurable and material. These can vary based on business and industry but should align with frameworks like the Corporate Sustainability Reporting Directive (CSRD), Science Based Targets initiative (SBTi), or double materiality assessments.
Research demonstrates that higher ESG scores correlate with increased valuation multiples, but more significantly, improvement in ESG scores over time has an even greater effect on valuation. This reflects management capability, long-term thinking, and reduced non-financial risk that buyers truly value.
Companies should regularly track progress using recognised methodologies such as GRI (Global Reporting Initiative), establish real-time dashboards monitoring ESG performance against defined KPIs, and integrate findings into marketing communications. Encouraging customer input on ESG priorities and responding with publicly available action plans prevents top-down strategies that may fail to resonate with core audiences.
The ESG Power and its Value Creation in Five Essential Ways
| Strong ESG Proposition(examples) | Weak ESG Proposition(examples) | |
| Expanding Market | Attract B2B or new customers with more sustainable productsAchieve more access to quality resources | Risk losing customers through poor sustainability practicesRisk losing access to quality resources |
| Reducing Costs | Preventive maintenanceLower energy consumption | Unnecessary wasteIncur fines, penalties, and enforcement actions |
| Compliance and Government Support | Reduce compliance burdensBenefit from government grants | Face limitations in marketing and sales practicesPotential consequences include fines, penalties, and enforcement actions |
| Increasing Productivity | Foster a motivated and productive workforceCreate a more innovative and problem-solving team environment by prioritising diversity | Employee burnout and reduced productivityInefficiencies and missed opportunities |
| Optimising Investment and Capital Expenditures | Ensure investments prioritise long-term valueAvoid poor investment decisions because of longer-term environmental issues | Focusing solely on short-term profits and neglecting investments in long-termInvesting in unsustainable technologies that incur high maintenance costs in the long run |
How to Implement an ESG Strategy
A tailored ESG strategy aligned with your values can give your company a competitive edge. Follow these key steps to craft one:
Supervise ESG Program
Active engagement is crucial for guiding and defining ESG best practices and reinforcing the concept of the ESG strategy as a top priority.
Define ESG issues
ESG frameworks serve as essential systems to standardise ESG reporting metrics and provide valuable references to identify key benchmarks and metrics.
Establish SMART objectives
SMART (Specific, Measurable, Achievable, Relevant, and Time-Bound) methods can provide companies with a clear timeline and facilitate monitoring process to set their clear goals
Integrate ESG principles into work ethic
Companies can start incorporating ESG practices into their company culture by training the management and employees and ensuring consistency for long-term improvements in ESG practices.
Generate ESG reports
ESG reporting with InCorp allows companies to measure and showcase the progress of their ESG practices. These reports can also boost employee morale by demonstrating their impact on daily work life and encourage stronger buy-in for ESG goals.
Public information and ESG disclosures
Companies often align ESG narratives with their brand and vision to help retain consumer trust. With growing public awareness of sustainability issues, catering to ethically and sustainably minded consumers is crucial for building trust and loyalty. Tailor your marketing strategy to integrate ESG practices with AsiaESG to ensure your brand is connected with socially-conscious consumers and enhance your brand’s appeal.
5 Ways ESG Can Add Value to Your Business Growth
Here is the breakdown of 5 ways ESG practices can add value to your business growth:
Expanding Market
ESG propositions help companies to enter new markets and expand businesses into existing ones. ESG can drive consumer preferences; 70% of consumers are willing to pay additional costs for green products. Studies have also found that companies with social engagement activities achieve higher valuations.
Reducing Costs
Implementing ESG strategies can reduce costs by addressing raw materials costs, water usage, carbon emissions, and other operational expenses.
Compliance and Government Support
A robust ESG framework not only enhances companies’ external value proposition but also mitigates regulatory risks and fosters government support, thereby safeguarding corporate profits.
Increasing Productivity
Fostering a sense of purpose and promoting positive social impact can attract and retain top-quality employees, leading to higher job satisfaction and enhanced productivity.
Optimising Investment and Capital Expenditures
Improved investment returns can be achieved by allocating capital towards promising and sustainable ventures, facilitated by a robust ESG proposition. ESG helps companies avoid stranded investments and align financial objectives with broader societal and environmental priorities.
Conclusion: ESG as Strategic Imperative
The evidence is unequivocal: ESG has evolved from a peripheral concern to a core driver of business strategy and sustainable growth. Companies that successfully embed genuine ESG commitments into their operations and strategy achieve measurable competitive advantages across multiple dimensions, financial performance, operational efficiency, access to capital, market positioning, talent management, and brand reputation.
In Indonesia, where robust regulatory frameworks mandate ESG integration, businesses have both the obligation and opportunity to embrace these principles. The shift in stakeholder perceptions represents a tremendous opportunity for companies to enhance brand image, attract investors, and drive sustainable growth whilst contributing to broader societal and environmental objectives.
Success requires moving beyond compliance to genuine integration, establishing leadership commitment, conducting materiality assessments, setting measurable objectives, investing in data systems, engaging stakeholders, and maintaining transparent reporting. Companies that overcome implementation challenges through structured approaches, dedicated resources, and cultural transformation position themselves for long-term resilience and prosperity in an increasingly ESG-conscious global economy.
The opportunity is clear, but so is the obligation: deliver substantive impact backed by verifiable data, or risk irrelevance in a marketplace that increasingly demands integrity and proof over promise. As climate and social issues intensify globally, ESG strategy is poised to become an even more decisive factor in achieving sustainable business growth and maintaining competitive advantage.
This article has been produced in collaboration with InCorp Indonesia.
For any enquiries or quotations about ESG Solutions, get in touch with our ESG Solutions department below:
