Why is ESG (Environmental, Social and Governance) important for a business

The ESG acronym stands for Environmental, Social and Governance. It refers to a set of non-financial measures that reflect a corporation’s impact on the environment and society.

ESG can be considered a subset of sustainability, which is defined by the UN World Commission on Environment and Development as ‘meeting the needs of present generations without compromising the ability of future generations to meet their own needs’.

The term ESG, or environmental, social and governance factors, was coined by the Global Compact in 2004.

However, the notion of incorporating all non-financial factors in business has been around for much longer; some might point to 2001 as the beginning of mainstream ESG with the launch of FTSE4Good indices.

While ESG influence has grown rapidly in recent years, sustainable investing is not a new concept.

Impact investing—the practice of making investments that generate not only financial returns, but also positive social and environmental impact—has its origins in religious groups who placed ethical parameters on their portfolios (refusing, for example, tobacco, alcohol, and gambling businesses).

ESG functions as a valuation technique that takes into account environmental, social and governance issues. ESG in the private sector is a set of criteria used to evaluate a company’s risks and practices.

The concept of responsible impact in business is not a new one, but has been gaining more widespread acceptance in the past few decades.

ESG covers issues that are, for the most part, longer-term considerations.

ESG risks are similar to other business risks in that it is important to understand, identify, quantify, and manage them, but certain ESG risks carry an added complication of being unpredictable.

For instance, the world is in uncharted territory with regards to climate and there is little relevant historical data to draw upon, since we are experiencing unprecedented changes. Thus, there is a need for investors to consider ESG criteria in their investment decisions.

Another characteristic of ESG risks is that they can be very costly.

To continue with the example of climate change, costs from climate change-related extreme weather ranks in the billions for each individual disaster. Therefore, while the cost of adaptation and mitigation can be substantial, the costs of uninsured losses far outweigh the cost of proactive mitigation.

Some examples of ESG risk management include assessing climate change risks to regular operations, assessing workplace culture, company diversity, etc.

ESG risk management supports sustainable, long-term growth by proactively evaluating potential issues; early knowledge of potential risk provides more time to adapt and develop cost-mitigating strategies.

The quality of a company’s ESG-related risk management is important to investors in weighing overall risk and return.

There are four main ESG strategies in the field of investing that can help guide one’s understanding of ESG application:

Most of the time, modern corporate ESG strategy will draw on elements of the four strategies, as each company tailors their ESG strategy to their unique strengths, weaknesses, opportunities, challenges, and timeline.

Board involvement and managerial support is critical to creating value through ESG strategies. Active involvement by corporate boards can help guide and shape ESG best practices and reinforce the idea of the ESG strategy as a priority. Companies may also want to create an ESG team or committee, bring in staff experts, and/or write up a charter to stay on track.

Identifying specific ESG issues and metrics to focus on can be difficult, due to the diversity of ESG frameworks and lack of a universal standard. Nevertheless, ESG frameworks are systems meant to standardize the reporting of ESG metrics, so they are helpful starting points for figuring out key benchmarks and metrics. Some of the most commonly used ESG frameworks and standards include:

Some corporations may choose to rely directly on one of these frameworks; the benefit to that approach is that the benchmarks have already been established, and often already provide an ESG score based on fixed criteria that allows corporations to compare their performance with peers of similar scores.

If a company chooses to tailor its metrics, there are usually a few basic metrics that universally make sense for ESG performance (for example, energy and water consumption for Environmental considerations).

The selection of other metrics will depend on considerations such as: the priorities of the company’s stakeholders, the ESG goals that the company decided to focus on, the company’s ability to consistently gather good data on the topic, etc.

Once the contextual research has been completed, companies will need to set the goals that will become the company’s roadmap for ESG matters. Goals should be Specific, Measurable, Achievable, Relevant, and Time-Bound. These parameters will help set a clear timeline, and facilitate the tracking process.

This step is rather long-term because it involves altering mindsets. Management and employees need to be trained and to buy into the ESG goals, and the company as a whole needs to continually work towards improving company culture and practices.

In determining which ESG issues and metrics to report on, the company has already done part of the work.

Compiling the gathered information into an ESG report allows firms to spotlight their initiatives and successes, thereby demonstrating progress to their stakeholders.

Transparency through these reports also has the potential to boost employee morale; being able to see the impact of their day-to-day work can encourage even stronger buy-in for ESG goals.

ESG reports are often produced annually, but timeline and distribution method can vary from company to company; the key is to have a strong and consistent reporting process.

Companies must ensure that their ESG narrative aligns with the brand and the company’s vision and future direction.

Lip service and greenwashing without evidence to back up claims of adherence to ESG factors is arguably worse than doing nothing, because a lack of authenticity can erode consumer trust and do lasting damage to the company’s reputation.

The need for ESG only seems to be growing as society enters unprecedented times: climate change, protests and social upheaval, increasing technological capabilities, the ongoing COVID-19 pandemic.

The lack of existing data on the situations that we now face make clear a need for frameworks that can quantify and mitigate unpredictable risks. ESG strategies can help meet those needs, while providing some guidelines on how to build more resiliency into the corporate universe.

In conclusion, no company can prosper nowadays if it is not involved in the community and the people around.

Companies need to take an active role in the community, beyond just making a profit. The positive benefits of this strategy include the company’s expansion and durability of its success.

So, what are you waiting for? Start implementing ESG today!

And this is where we can help:

If you want to succeed in your sustainable journey… Save time, get organized, and stay compliant with our tool!

Thanks to our AI, apiday provides you with a simple and efficient process for your data collection, verification, reporting, and certification.

Get your organization started and book a call with our ESG experts!

ESG stands for Environmental, Social and, Governance, the factors companies integrate as part of their business strategy.

Companies should be concerned with ESG because it helps them do business in a way that is more consistent and aligned with their values and their stakeholders’ expectations. This approach minimizes risk and can help them avoid reputational damage. A company’s ESG performance also affects its bottom line, its ability to secure funding or retain employees.

The “E” captures energy efficiencies, carbon footprints, greenhouse gas emissions, deforestation, biodiversity, climate change and pollution mitigation, waste management and water usage.

The “S” covers labor standards, wages and benefits, workplace and board diversity, racial justice, pay equity, human rights, talent management, community relations, privacy and data protection, health and safety, supply-chain management and other human capital and social justice issues.

The “G” covers the governing of the “E” and the “S” categories—corporate board composition and structure, strategic sustainability oversight and compliance, executive compensation, political contributions and lobbying, and bribery and corruption.