ESG stands for Environmental, Social, and Governance. It is a framework used to evaluate the sustainability and ethical impact of a company’s business practices.
Environmental factors refer to a company’s own impact on the environment and the impact of their suppliers, including their carbon footprint, waste management, and resource conservation. Social factors include a company’s impact on its employees, customers, and communities, including issues such as labor practices, human rights, diversity and inclusion, and community engagement. Governance factors refer to a company’s internal management practices, including transparency, accountability, and ethical leadership.
Here’s why ESG is a game-changer and not just a passing fad.
Consumers want to support companies that do good.
Customers want to do business with companies that adhere to ESG principles because it aligns with their values and beliefs. Many customers are becoming more conscious about their purchases’ impact on the environment and society, and they want to support companies that share their values.
For example, customers may prefer to buy products or services from a company committed to reducing its carbon footprint, has fair labor practices, or supports diverse and inclusive workplaces. By choosing to do business with companies that prioritize ESG, customers feel like they are making a positive impact and contributing to a better world. In addition, customers are increasingly using ESG criteria to evaluate companies and make purchasing decisions. ESG performance can be an indicator of a company’s long-term sustainability and financial performance, as companies that prioritize ESG may be better equipped to manage risks and adapt to changing market conditions.
According to a survey by Accenture, 62% of consumers globally want companies to take a stand on current and broadly relevant issues such as sustainability, transparency, and fair employment practices. This growing desire for ESG principles from customers emphasizes that displaying a new ESG initiative cannot simply be a marketing ploy but needs to be founded in reality.
Companies that demonstrate a commitment to ESG issues are more likely to attract and retain top talent.
Employees want to work for companies that adhere to ESG for a variety of reasons. First, employees today, especially Millennials and Gen Z, prioritize purpose and social responsibility in their work. Employees have a growing desire to contribute toward something that will outlive them. They want to work for companies that align with their personal values and positively impact society and the environment. By working for a company that adheres to ESG principles, employees feel like they are part of something meaningful and can contribute to positive change.
Second, companies that adhere to ESG principles are often viewed as more ethical and transparent. Employees want to work for companies that act with integrity and are transparent about their business practices. ESG reporting and transparency can help build trust with employees, as well as customers, investors, and other stakeholders.
Third, companies that prioritize ESG are often viewed as more innovative and forward-thinking. These companies are often early adopters of sustainable technologies and practices and are seen as industry leaders. Employees want to work for companies that are at the forefront of their industry and driving positive change.
Finally, companies that prioritize ESG often have better reputations and brand recognition. This can lead to increased customer loyalty, which can, in turn, lead to greater job security for employees. Additionally, companies that prioritize ESG are often more financially stable and better able to weather economic downturns, which can provide a sense of security for employees.
A Glassdoor survey found that 64% of job seekers consider a company’s social and environmental commitments when deciding where to work.
ESG is tied directly to an organization’s bottom line.
ESG practices can help companies with regulatory demands, risk mitigation, and cost reduction in several ways.
1. Regulatory demands: ESG practices can help companies meet regulatory requirements and avoid penalties. For example, companies that implement environmentally sustainable practices can comply with emissions, waste disposal, and water usage regulations. Similarly, companies that prioritize social responsibility can comply with labor laws, fair trade regulations, and human rights policies.
2. Risk mitigation: ESG practices can also help companies mitigate risks related to environmental, social, and governance factors. For example, companies prioritizing environmental sustainability can reduce the risk of damage to their reputation or legal liability related to pollution or waste. Similarly, companies prioritizing social responsibility can reduce the risk of negative publicity, consumer backlash, or employee discontent related to labor practices or human rights issues.
3. Cost reduction: ESG practices can also help companies reduce costs associated with environmental and social impacts. For example, companies that implement energy-efficient practices can reduce their energy consumption and associated costs. Similarly, companies prioritizing social responsibility can improve employee satisfaction and reduce turnover, lowering recruitment and training costs.
These practices should be implemented not only throughout an organization but should also be required from any supplier to that organization. Having the entire supply chain adhere to these policies strengthens each organization’s ESG position.
ESG matters to potential investors.
The use of ESG criteria in investment decisions has become increasingly prevalent in recent years. Here’s why:
1. Aligning with values and beliefs: ESG investing has become increasingly popular among investors seeking to align their investments with their values and beliefs. Investment firms that incorporate ESG criteria into their investment strategies may be more attractive to investors looking to invest in companies that prioritize sustainability and responsible business practices.
2. Risk management: Investment firms are looking to mitigate potential risks associated with their investments, and ESG criteria provide a framework for assessing risks related to climate change, environmental impact, social issues, and corporate governance. Companies that perform well on these criteria may be less likely to face regulatory fines or reputational damage, which can impact their financial performance.
3. Long-term sustainability: Investment firms are recognizing the importance of long-term sustainability in their investments. Companies that prioritize ESG factors are more likely to have a long-term outlook and be better positioned to adapt to changing market conditions, regulatory environments, and societal expectations.
4. Opportunities for growth: Companies that perform well on ESG criteria may be better positioned to capitalize on opportunities for growth in emerging markets and industries, such as renewable energy, sustainable agriculture, and green technologies. Investment firms that identify these opportunities early may be able to generate strong returns for their investors.
Overall, investment firms are increasingly using ESG criteria to evaluate and screen potential investments because they recognize the potential risks and opportunities associated with sustainable investing and are seeking to align their investment strategies with the growing demand for responsible and sustainable business practices.
According to a report by Morningstar, global sustainable funds attracted record inflows of $1.7 trillion in 2021, which is more than double the previous record set in 2020. And a report by the Global Sustainable Investment Alliance (GSIA) estimated that sustainable investing assets reached $35.3 trillion globally in 2020, up 15% from 2018.
ESG can help to create a more sustainable future for generations to come.
ESG alone may not save the planet, but it can be a crucial tool in promoting sustainable business practices and reducing the negative impact of human activity on the environment. By incorporating ESG factors into investment decisions, companies, and investors can encourage sustainable practices and promote the development of innovative technologies that can reduce carbon emissions, boost energy efficiency, and protect natural resources.
Moreover, by encouraging companies to incorporate ESG factors into their supplier selection and operations, stakeholders can help reduce the negative impact of business activity on local communities and the environment, ultimately promoting long-term economic sustainability. Additionally, ESG can help companies identify and mitigate risks related to environmental and social factors, leading to better long-term performance.
Ultimately, the impact of ESG on the planet depends on the actions of companies, investors, and individuals to make meaningful changes in the way they operate and invest. ESG is a powerful tool that can help encourage those changes and promote a more sustainable future for all.