Sustainability concept introduced in the corporate finance is generally used to refer to a model of tapping different sources of finance and making investment decisions at the corporate level by taking due account of environmental, social, and governance (ESG) considerations leading to increased longer-term investments into sustainable economic activities and projects. The concept of sustainability in corporate finance has evolved over years on the lines of principles followed by cooperative and mutual sector and adopted in the mainstream corporate sector and its reflections can be found in fragmented form of existing mandatory corporate social responsibility (CSR) spending and requirement of furnishing corporate sustainability reports.
Modern companies are increasingly adopting to the goal of long-term sustainable value creation rather than just maximizing profit or shareholders’ value. The long term sustainable value creation objective at corporate level attempts to integrate broader social and environmental aspects into the financial value creation fold for contributing towards the ultimate objective of transitioning towards sustainable economy which is in conformance with global practices followed by companies in different developed countries of world. Thus, sustainability in corporate finance aims at achieving the objective of sustainable value creation assimilating within its fold interests of all stakeholders in place of erstwhile objective of profit maximization and the modern practice of shareholders’ value creation. It has been observed that the popular shareholders’ value creation model has held companies back from adopting sustainable business practices in design and implementation of the corporate long term investment strategy in sustainable economic activities and projects. It may be due to increasing awareness among shareholders about social and environmental concerns compelled by rising trends among institutional investors for investing in companies adopting sound ESG practices. The Sustainable value creation approach ranks interests of all stakeholders equally. Such a move to the stakeholder model requires new rules for corporate governance and decision-making on corporate investments to deal with the various interests of current and future stakeholders.
This study attempts to tender a general picture about different emerging concepts related to ESG and sustainable value creation in corporate finance and how it is going to impact companies in India based on evidences obtained in different countries of the world.