Corporates are increasingly integrating environmental, social and governance (ESG) considerations into their strategic and managerial decision-making. The objective is not merely to address environmental and social concerns, but also to create sustainable value for a wide range of stakeholders. However, as ESG becomes increasingly embedded in corporate strategy, managers need to ask a more fundamental question: Do investments in ESG create or destroy business value, and through which channels?
This question has become particularly relevant in India, where sustainability reporting has moved from voluntary disclosure towards a more structured regulatory framework. In 2021, the Securities and Exchange Board of India (SEBI) introduced the Business Responsibility and Sustainability Report (BRSR), requiring the top 1,000 listed entities by market capitalisation to report on ESG-related parameters. However, disclosure alone does not create value. While such reporting has brought greater structure and transparency to corporate sustainability practices, the focus now needs to shift from disclosure to the use of ESG information to make better business decisions and create long-term value.
For example, Mahindra & Mahindra Limited’s recent Integrated Annual Report 2025–26 illustrates how sustainability can be connected to operating efficiency. The company has set a target to achieve carbon neutrality by 2040, including through emissions reductions across its businesses. Its report also highlights how energy conservation can strengthen operational efficiency, reduce downtime and minimise unplanned shutdowns. The company has developed metrics to track and monitor energy productivity and assess the impact of sustainability initiatives and sector-specific improvements. A compressed-air optimisation initiative at its Kandivali manufacturing plant reduced overall plant energy use by approximately 3% and generated annual cost savings of around ₹0.5 crore, with plans to replicate the initiative across other manufacturing locations. This example demonstrates how a sustainability initiative can become part of a manager’s financial decision-making framework when its impact can be translated into measurable operational and financial outcomes.
Examining the social dimension of ESG practices, investments in employees, diversity, health and safety, and skill development should not be viewed merely as expenditures incurred. For example, McKinsey estimates that improving employee health and wellbeing could generate between $3.7 trillion and $11.7 trillion in economic value globally. If a company spends more on employee development while simultaneously reducing employee turnover and improving productivity, this indicates that the investment has generated an economic return.
Governance provides another important link between sustainability and financial value. Better governance can improve monitoring, enhance transparency and reduce information asymmetry. These mechanisms can strengthen the confidence of both investors and creditors, potentially influencing financing costs and firm valuation. This perspective is also supported by my research on ESG and executive compensation in the Indian context. Using Indian listed firms, the study finds that higher ESG performance is associated with higher executive compensation and that firms with high ESG scores and higher executive compensation exhibit higher market valuations. The findings therefore highlight the importance of integrating ESG considerations into managerial incentives and strategic decision-making. My research on ESG and credit risk provides another perspective. ESG performance is relevant not only to shareholders but also to creditors. Creditors are concerned with the probability and cost of default and therefore evaluate whether a company’s ESG practices can reduce operational, regulatory, reputational and governance-related risks. This suggests that ESG can influence how different capital providers perceive and price corporate risk.
Managers should consequently understand how each pillar of ESG practices creates value, for whom, and over what time horizon. An environmental investment may generate value through lower energy costs and reduced regulatory exposure. A social investment may create value through higher productivity and employee retention. A governance investment may reduce agency costs and information asymmetry and potentially improve access to capital. The same ESG initiative can therefore affect the income statement, balance sheet, cash flows and cost of capital through different channels.
There can also be a tension between business growth and sustainability objectives. The rapid expansion of artificial intelligence and data-centre infrastructure provides a good example. Companies may simultaneously pursue ambitious carbon-reduction targets while investing heavily in technologies and infrastructure that can substantially increase energy consumption and emissions. This highlights the difficulty of pursuing technological growth while simultaneously meeting ambitious environmental objectives. Therefore, sustainability cannot be managed independently of business strategy. A company may have ambitious environmental targets, but if its core business model drives rapidly increasing energy demand, managers must evaluate the trade-offs among growth, investment, energy use, and environmental commitments. This is where the role of tomorrow’s managers becomes particularly important. They need to be able to incorporate ESG considerations into capital budgeting decisions, valuation assumptions, financing decisions, incentive structures, and risk assessments. This requires managers to view ESG not as an additional cost or compliance exercise, but as an investment whose economic consequences need to be identified and evaluated.