What is ESG and why is it important?
Businesses have been vastly affected by the pandemic, and it has opened our eyes towards new conducts of undertaking risks and creating resilience towards any upcoming obstacles. Furthermore, we have seen evidence suggesting investors who apply robust ESG guidelines to their investment see significant benefits and better returns.
This article explores the ESG framework and provides insight into its uses.
What is ESG?
ESG stands for Environmental, Social, and Governance. These are the three areas that companies report on to give an overview of how sustainable and responsible their company is.
Stakeholders use this information to then make informed decisions about companies they think they would invest in. Companies voluntarily disclose this information to consultancies and agencies that then use their responses to generate ESG scores. These scores are what tell investors about how the companies are performing. Many countries have implemented regulations such as carbon taxes which pushed businesses and even banks to integrate ESG guidelines.
The Environmental factor evaluates how a business performs and analyzes how its activities affect the environment and mitigate the risks. These activities could be direct operations or down the supply chain. For instance, monitoring energy usage, greenhouse gas emissions, management of resources, and contribution to natural resources. (Bernoville, 2021)
The Social factor inspects the flaws and assets of working conditions, health and safety, employee diversity, and the company’s relationship with the employees, suppliers, and communities. The social impact of a business proves how they foster its society and culture that affect the broader community. Their inclusivity and diversity will create a further sustainable future. (Bernoville, 2021)
The Governance factor explores the control and the practices in a company’s leadership, audits, inspections, and investor rights. Investors are part of a business and want transparency in all the major decisions being taken in the company, whether it is a matter of gender equity or board diversity. (Bernoville, 2021)
What is the process of ESG, and how to implement it into your business?
There are seven main steps to consider when implementing the ESG strategy into your business.
The first step is to conduct a materiality assessment which is integral in the process of ESG. It consists of exercises to identify, refine and assess abundant potential environmental, social, and governance issues that could affect businesses and their investors. This is then summarized in a shortlist or materiality matrix to inform the company of a strategy and aim their targets and tackle any future endeavors. It is also beneficial to analyze competitors, opportunities, and industry encounters. The production of a well-executed materiality assessment will authenticate your priorities, communication pathway, and tactical action. (Chu, 2021)
The second is to assess the baseline of your existing state. Once you have pinpointed your targets and priorities, it is vital to start setting up policies and metrics in the company to get a better idea of the ESG roadmap. (Chu, 2021)
Once you have identified your baseline, the next step will be to set the objectives and goals to move forward. For instance, how to evaluate performance and due dates for action compliance. (Chu, 2021)
Once the first three steps provide a decent foundation have been accomplished, a gap analysis is recommended between the current state of the company and your goals to identify the missing gaps and strategize accordingly. (Chu, 2021)
One of the most integral parts of the ESG journey is to develop the ESG roadmap, which consists of key actions that provide stakeholders a clear image of the assets and targets of the company. It is significant in this phase to consider how this framework fits with the company and how it is applied due to its function and location. (Chu, 2021)
The next step is to set an action plan and measure Key Performance Indicators (KPI) by constantly monitoring plans and modifications required. A centralized management system or a data management system could be beneficial to follow up on the key metrics and their performance. (Chu, 2021)
After all the phases building up to the ESG journey, the last step is to create a report compiling the progress in a summarized approach. The report must consist of the communication pathway to the investors/ stakeholders of the ESG strategy in alignment with the business goals, ESG policies, and programs, metrics, and evaluation of the progress in the ESG journey.
It is imperative for the business to partake the investors on the ESG journey and progress, such as annual reporting and/or presentations. Additionally, it is favorable to provide regular internal reminders and updates to strengthen the importance of ESG to the company. It is incredibly crucial to keep in mind that this is not a one-time plan and will continue to grow. (Team, 2021) (Chu, 2021)
How does ESG contribute to businesses?
Simply, once businesses include ESG as their priority, there will be added value to the company. Small businesses profit from ESG by accelerating decision making, flexibility, and smoother contact with the clients/customers to ease the communication process. (BEERGI, 2021)
Suppose businesses replace operational tactics with greener choices such as renewable energy, sustainable packaging, soft copies for receipts, and waste management. In that case, they can effectively reduce carbon emissions and save future costs and expenses. Besides, investors tend to pursue small and medium enterprises (SMEs) with higher ESG values. (BEERGI, 2021)
ESG generally adds top-line growth to a business. It has been stated that approximately 75% of the Millennials are keen and willing to pay for a sustainable and environmental product in the United States, as detailed in the GreenPrint’s Business of Sustainability Index report released in March 2021. (Koch & Harris, 2021)
The ESG strategy undeniably reduces the costs by cutting down resources, which is either done by recycling or reusing. So, for example, any company with plastic as their main resource could be recycled and reused, hence reducing carbon emissions and costs.
Companies that take on ESG strategies have increased competitive value due to adapting environmental conditions and yield on future opportunities. For instance, adding worth to your employees and communities can profit the company by gaining loyalty, diversity, and momentum in its expansion and growth. Millennials are the future of companies either as employees, consumers, or investors; in addition, they have a massive impact on the economic development of businesses; therefore, it is crucial to provide sustainable provisions in any business plan. (Atkins, 2018)
Investors contribute to businesses that have implemented ESG values, and this encourages businesses in the first place to add ESG values. In short, investors are the push behind the businesses to apply ESG policies. This indicates that investors and businesses are an operational force towards ESG due to the added long-term value.
Durable ESG programs can also increase stock liquidity, attract young talents, and enhance productivity. Companies with high ESG scores attract talent and gain the employees’ pride towards the company, which positively impacts the community. The upcoming generation favors companies with environmental, social, and governance values. (Atkins, 2018)
Conclusion
ESG is in demand and fits all types of businesses for both short- and long-term benefits. To drive ESG goals requires leadership and keeping up to date with new sustainable technologies and approaches to achieve net-zero goals. ESG has allowed businesses to positively impact the environment and community by reducing costs and attracting talent. As mentioned before, the upcoming generation is the primary acceleration and drive towards economic growth. The term sustainable comes into play with the upcoming generation taking the lead and driving ESG goals into businesses. (BEERGI, 2021)
References
Atkins, B. (2018, June 5). Strong ESG Practices Can Benefit Companies and Investors: Here’s How. Retrieved from Nasdaq: https://www.nasdaq.com/articles/strong-esg-practices-can-benefit-companies-and-investors-2019-03-13
BEERGI, A. (2021, July 12). Why Is ESG More Important Now Than Ever For Your Business? Retrieved from Regask: https://regask.com/why-is-esg-more-important-now-than-ever-for-your-business/#_ftn5
Bernoville, T. (2021, July 13). Why is ESG important for companies and investors? Retrieved from Plan A Earth: https://plana.earth/academy/why-esg-important-companies-investors/
Chu, P. (2021, March 24). 7 Steps to Develop and Implement an ESG Strategy. Retrieved from Anteagroup: https://us.anteagroup.com/news-events/blog/develop-and-implement-an-esg-strategy
Koch, M., & Harris, Z. (2021, March 22). GreenPrint Survey Finds Consumers Want to Buy Eco-Friendly Products, but Don’t Know How to Identify Them. Retrieved from Business Wire:
Team, S. E. (2021, April 12). The Importance of ESG Strategy. Retrieved from Sphera: https://sphera.com/spark/the-importance-of-esg-strategy/
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