Compliance with the ESG standards is not going to be an option soon for business enterprises functioning even in developing countries like Bangladesh. But as Bangladesh becomes more connected with the rest of the world and international trade becomes much more prevalent, complying with global ESG standards will become a mandatory practice for all businesses which wish to play with the rest of the world.

As the abbreviation "ESG" suggests, there are three major factors the investors consider when assessing the potential of a business enterprise and they are environmental, social and governance.

Environmental factors encompass a company's efforts to reduce its carbon footprint, manage natural resources efficiently and implement sustainable practices to mitigate risks tied to climate change and resource scarcity. This, in turn, can reduce operational costs, enhance resource utilisation and attract eco-conscious investors and customers. Investors nowadays seek firms committed to renewable energy, efficient waste management and environmental transparency.

Social aspects involve evaluating a company's treatment of employees, diversity and inclusion policies, and community engagement. Socially responsible initiatives, like fostering diversity and inclusion or engaging in philanthropy, contribute to a positive organisational image. A strong societal reputation can bolster brand loyalty, attract top talent, and improve stakeholder relationships, translating into a stronger market position. Investors look for businesses that prioritise fair labour practices, employee wellbeing and engagement with local communities.

Governance factors assess a company's leadership and board structure and adherence to ethical and legal standards. Shareholders seek transparent governance, effective risk management and accountability mechanisms to ensure long-term stability and ethical conduct within the organisation. Sound governance practices, including transparent decision-making and effective risk management, build trust with investors and stakeholders. This trust can lower the cost of capital and enable long-term growth and stability.

As more investors look to put money into companies with stronger ESG performance, larger pools of capital will be available to those companies not only in equity markets but also in loan markets, where banks are linking interest rates on loans to ESG performance.

Positive action and transparency on ESG matters can help companies protect their valuations as more global regulators and governments mandate ESG disclosures. After the European Union announced broader disclosure requirements, the stock market reacted positively to firms with strong ESG disclosure. Many emerging markets, including South Africa, Brazil, India and China, are also adopting and enforcing disclosure regulations.

As more investors with more assets under management commit to ESG investing, they will have more voting power to effect changes. Shareholders in a number of companies have already put forward proposals to improve gender diversity on the boards, garnering a level of support that was unimaginable before.

As ESG-minded business practices gain more traction, investment firms are increasingly tracking their performance. Financial services companies such as JPMorgan Chase, Wells Fargo and Goldman Sachs have published annual reports that extensively review their ESG approaches and the bottom-line results. The ultimate value of ESG investing will depend on whether they encourage companies to drive real change for the common good, or merely check boxes and publish reports. That, in turn, will depend on whether the investment flows follow ESG tenets that are realistic, measurable and actionable, according to investopedia.com.

The author is an economic analyst.