ESG: It Matters to Your Company But What Is It?

Putting the United Nations Sustainable Development Goals (SDGs) — the leading ESG framework for large companies — at the center of the world’s economic strategy could unlock $12 trillion a year in opportunities and generate 380 million jobs.
– Business and Sustainable Development Commission

Innovation in business has been instrumental in driving progress globally. Nonetheless, it’s increasingly evident that certain obstacles cannot be overcome solely through the quest for financial gain. In fact, some of these difficulties spawn as unintended consequences of commercial activities. Consequently, numerous facets of our lives, such as the environment, community, and corporate conduct, are currently in a state of deterioration.

As a business leader, you have a legal obligation to optimize your strategy and resources in order to maximize returns for your shareholders. Consequently, you may believe that it is neither your responsibility nor in your best interest to be concerned about environmental, social, and governance (ESG) issues.

The belief that incorporating ESG into your business strategy will hinder profits is a widespread misconception. On the contrary, integrating ESG can create opportunities for growth, decrease expenses, and fortify your brand’s reputation with an ever-more socially aware audience.

 

Environmental

In the context of ESG principles, the term “environment” today generally refers to the physical surroundings that sustain our lives and well-being. This encompasses three main categories: climate change, depletion of vital resources (especially freshwater), and pollution (both of air and water). Often, these factors combine to exacerbate their impact. For instance, floods are increasingly frequent and are impacting larger populations. Some environmental impacts are more immediately apparent, such as oil spills in waterways or smog in the atmosphere.

Social

According to Forbes Magazine, a company’s social responsibility can be gauged by the extent to which it prioritizes the needs of society over financial goals. Grasping the concept of “sustainability” assists businesses in determining their organizational values. It helps businesses to incorporate  them into their supply chain, encompassing factors such as diversity, equity, and inclusion.

An essential aspect of social sustainability is comprehending a company’s interaction with its surroundings, both people and environment. In order to remain competitive and responsible towards its stakeholders, including customers, employees, and suppliers, businesses need to cultivate favorable relationships with them. Additionally, they should take measures to avoid contaminating the local environment or exploiting susceptible communities through their operations.

People are the backbone of any company. Their physical and emotional welfare is critical to creating a thriving and efficient work environment. Businesses should ensure equitable treatment and sufficient resources for their employees to perform effectively. This encompasses providing skill development, equitable compensation, health benefits, and other support. Furthermore, companies should consider the effects of their operations on the surrounding communities where they operate.

Governance

The “G” in ESG pertains to the governance aspect of decision-making. This encompasses policy formulation and allocation of rights and obligations among the different stakeholders in the company, including the board of directors, managers, shareholders, and other parties. Governance practices that reflect societal values are crucial for both businesses and investors. While environmental and social issues require attention, creating sustainable business models begins with sound governance practices. It starts from the top and influences all other aspects of the organization, down to the grassroots level.

Comprehending governance issues is crucial as they form the bedrock of efficient corporate and business ESG management. They serve as a foundation for developing and assessing corporate social responsibility and sustainability initiatives. Governance constitutes a significant aspect of the overall corporate strategy and performance. It influences the utilization of resources such as capital and talent, market dynamics (with the boardroom playing a pivotal role), and compliance with legal and regulatory frameworks. All of these aspects are fundamental to achieving the company’s objectives.

Board independence, shareholder democracy, accountability, disclosure, decision-making processes, transparency, conflicts of interest, whistleblower protections, and assurance are prioritized to varying degrees in different countries based on their respective governance frameworks. Corporate governance constitutes a crucial aspect of ESG, particularly in light of businesses’ errors and heightened awareness of global diversity and income inequality.

Why is ESG Important?

While it’s a positive development that companies are starting to adopt ESG policies, it’s important to recognize that these policies are not perfect and should not be expected to work miracles right away. They represent a step in the right direction but we need to remember that ESG is still a relatively young movement.

It’s also worth noting that ESG is not just for large corporations; everyone can make a difference. If you have the means to invest, consider putting your money into companies that align with your values and work towards positive change.

As people become more aware of how their actions impact the world around them, it’s crucial that we take action to create a better future for ourselves, future generations, and the planet. While this article has only touched the surface of the topic, we hope it inspires you to take a step in the right direction.

ESG holds great significance for businesses due to several reasons. Firstly, as reported by the Financial Times, ESG is a critical determinant of company performance. It’s the most reliable metric for measuring environmental, social, and governance accomplishments. This implies that companies prioritizing ESG are likely to outperform those that don’t.

Additionally, ESG is important for the following reasons:

1. By paying attention to ESG factors, companies can enhance their image and reputation, thereby attracting greater investor interest.
2. 2. ESG has the potential to impact the triple bottom line by driving the creation of new government regulations globally.
3. ESG compels companies to innovate, leading to the discovery of various new opportunities.
4. ESG is not only advantageous for the present generation but also for future ones, i.e. for your children and grandchildren.

As sustainability continues to rapidly grow, integrating it into your business practices becomes essential. Your company can either contribute to the problem by hiding behind misleading data or become a transparent leader and be part of the solution.

Only one of these choices is sustainable in the long run.