You may have noticed lately that there is a lot of talk about ESG for companies and sustainability in the media. And many companies that we talk to are wondering what sustainability can do for them. But for companies looking to accelerate their growth and maximize profits, incorporating Environmental, Social, and Governance (ESG) criteria into their policies is becoming an increasingly popular route to success. But most importantly, we are entering the age of Stakeholder Capitalism and it will soon tied to everything your business does. So, keep reading and get ahead of the curve! And the competition.
- What is ESG?
- What are the 3 essential pillars of ESG?
- Where did ESG begin?
- What is the most important factor in ESG?
- Why are companies embracing ESG?
- How does ESG create value for companies?
- Do companies with ESG perform better?
- How does ESG impact corporate performance?
- Does ESG improve profitability?
What is ESG?
Put simply, ESG involves taking into account the environmental impact of a company’s operations, its corporate social responsibility (CSR) initiatives, and good governance practices when making decisions. These elements are based on the wider elements of the United Nations Sustainable Development Goals. Adopting this approach within an organization, can not only lead to a more ethical way of doing business but also result in tangible financial benefits that serve as real incentives. This blog post will discuss some of the key advantages companies stand to gain by implementing ESG-SDG-centric processes within their business entities.
What are the 3 essential pillars of ESG?
To understand how ESG criteria can benefit companies, it is important to first understand the three essential pillars of ESG:
1. Environmental Performance: This covers a company’s environmental policies and practices, such as reducing its carbon footprint, energy consumption, or what is being done for climate change mitigation.
2. Social Performance: This looks at a company’s efforts on social responsibility and how it contributes to the communities it operates in. This could include initiatives like workforce diversity and inclusion programs, labor practices, or working on projects that benefit communities.
3. Governance: This looks at a company’s accountability, ethics, and transparency measures. It also covers how its leadership team is structured and how decisions are made within the organization.
The bottom line is that a sustainable company is one that places these three aspects at the forefront of its operations, thereby creating a business strategy that actively seeks to improve the environment and uplift local communities while also generating profits. People, planet, profit.
Where did ESG begin?
Some would say that getting companies to act in ethical ways started with Isaac Le Maire in 1608. When confronted with corruption within the Dutch East India Company, he bought the company’s stock. Then he pressed for more ethical operations in their business dealings with the locals. And thus, impact investing was born.
More recently, ESG was re-born out of the need to create a more ethical and transparent business model. One which seeks to protect the environment while also creating social and economic value. Being sustainable means operating in a way that does not jeopardize the well-being of future generations.
The concept has been growing in prominence over the past few decades as investors become increasingly aware of sustainability issues. Research shows that a whopping nine out of ten Millennials are conscious about sustainability, and around one-third often consider environmental, social & governance factors when shopping or looking for jobs. For Gen-Z and beyond, the emphasis on sustainability is expected to rise even further.
What is the most important factor in ESG?
When assessing the value of a company and making decisions about investing, examining its Environmental, Social, and Governance (ESG) has become increasingly important. ESG provides investors with insight into how well a company is managing non-financial risks related to its environmental impact, social responsibility, and corporate governance. Of the three factors that makeup ESG, corporate governance is often viewed as the most critical and influential factor. This is because Tone-at-the-Top matters. Sound corporate management can protect against non-financial risks and usually indicates positive long-term performance. Corporate governance also highlights how efficiently management teams operate relative to their peers. This points to stability and competitive advantages that can drive returns and engagement. This is a bit of a trick question because it is important to look at ESG and sustainability is like a tripod. Removing one leg makes it unsustainable. Having a great environmental score while paying non-liveable wages offshore to produce products will only get you flagged for greenwashing. Your boar diversity doesn’t matter if your raw wastewater is leaking into the local water table. In the end, it is important to have a healthy balance of all three.
Why are companies embracing ESG?
There are many reasons why companies are embracing ESG around the world. Some of the most common include:
1. Improved Brand Reputation: Companies that demonstrate commitment to ESG are seen as more ethical, reliable, and trustworthy in the eyes of customers, leading to better customer loyalty and a favorable reputation in the market.
2. Attracts Investors: Investors are increasingly looking for companies with good ESG practices. And it won’t be long before these factors are directly tied to financing and investments.
3. Better Employee Retention: Companies with good ESG practices tend to attract talent, leading to better recruitment and retention rates as well as lower employee turnover costs. It can also help reduce the Quiet Quitting trend.
4. Regulatory Compliance: Governments across the globe are introducing new regulations that require companies to adhere to certain ESG standards, making it essential for organizations to stay up-to-date on these rules.
5. Increased Profitability: Companies that focus on ESG often have better operational efficiencies and cost savings, leading to higher profits over time. By creating sustainable business models, companies can also reduce their risk of being impacted by environmental disasters or social unrest.
How does ESG create value for companies?
Measuring value beyond the financials is essential for companies to deliver long-term success and resilience. ESG provides executives the opportunity to evaluate their company’s performance from an entirely different angle. The three ESG pillars can assist companies in increasing their bottom line by examining the following areas:
1. Mitigating long-term risk: Companies that consider integrated reporting and assess ESG risks will have a more accurate assessment of any potential long-term risks. This helps them to make more informed decisions, ensuring they are better prepared for unexpected events or unexpected changes in the market.
2. Improving operational efficiencies: By understanding what external factors could be impacting their operations, companies can improve efficiency and contribute to reduced costs in the long run.
3. Strengthening stakeholder engagement: Companies that embrace ESG efforts have strong relationships with stakeholders such as customers, employees, investors, and the wider community. This is because they understand their impact on society and take responsibility for it.
4. Creating new opportunities: Companies that are focused on ESG efforts can create new products, collaborations, and business models that focus on sustainability and social impact. This leads to greater innovation, collaboration, and growth potential.
Do companies with ESG perform better?
In the 1980s when measuring companies through ESG-related criteria, the traditional view was that there is a trade-off between financial performance and ESG integration. But this did not prove to be true over time. Applying sustainable practices forces a company to evaluate itself as it never has before. This unearths hidden risks and potential opportunities that can have a positive effect on the bottom line. So over time, ESG shows companies where they can mitigate risk and be more effective in their business. What a company decides to do with those insights, is purely its own choice.
How does ESG impact corporate performance?
While it is a very broad and general subject, ESG can impact many aspects of performance. ESG includes factors such as quality management, risk mitigation, and stakeholder relations which all help inform better decisions for the business. By having a clear understanding and focus on sustainability, companies can identify risks that may have not been identified before. In turn, thereby reduces the chances of failure or major losses. On the other hand, companies with better ESG practices will have increased access to capital and improved efficiency leading to cost savings. With ESG becoming increasingly important in the market, companies that embrace these initiatives can meet competitive challenges. Ultimately, this creates value for the organization as it is able to create long-term sustainability and resilience while meeting customer’s expectations.
Does ESG improve profitability?
There are many uncontrollable factors that can affect your bottom line. However, when managed correctly, ESG initiatives can help companies improve profitability. By understanding the environmental and social impacts of their operations, companies are better equipped to make informed decisions that will benefit them in the long term. This could include finding new sources of revenue or improving customer loyalty. Employing sustainability practices also helps companies reduce costs as they become more efficient and reduce their environmental footprint. Additionally, companies that have implemented ESG initiatives are more likely to attract high-quality employees and investors as they become more attractive to those stakeholders. If you believe there is a correlation between a company’s brand value and profitability, then you have already answered this question.
What does an ESG score really say about a company?
First of all, it is important to understand that ESG is a framework. It is designed to measure key metrics on the sustainability and social impact of an organization. An ESG score is basically a snapshot of how well a company is doing in terms of its environmental, social, and governance practices. The higher the score, the better the performance. A low score indicates that a company could be doing better in certain areas. But it is not a sprint, it is a marathon. An ESG score is a work in progress, and as long as you are making an effort and measuring KPIs, then you are headed in the right direction.
Why is ESG so important right now?
There are many reasons why sustainability is important now. It has been growing for decades, but the impetus was never enough for wide-scale adoption. Publicly traded companies must submit some form of ESG policies or CSR reports to the public, while mid-sized and small businesses are free to do so on a voluntary basis. But the recent COVID-19 Pandemic made us realize how fragile our systems are. It also revealed how vulnerable the supply chain is. It also showed us the faces of the people who are in that supply chain. Then add multiple billion dollar weather events and natural resource scarcity. To make matters even worse, when Russia invaded Ukraine, it caused food insecurity across half of the globe. Moreover, Russia weaponized its oil supply to Europe as winter approached. It quickly became evident that this was not sustainable.
How are companies using ESG?
When it comes to your ESG goals, there are many ways they can be used to benefit your company. We work with companies that are using their sustainability to:
1. Develop long-term business strategies
2. Leverage investment and build trust
3. Improve operational efficiency by reducing waste and cost reduction
4. Enhance their reputation and demonstrate commitment to corporate social responsibility
5. Identify new markets, customers, and opportunities for growth
6. Foster strengthening relationships with stakeholders including employees, customers, and suppliers
7. Mitigate risks associated with climate change, natural disasters, and other crises
8. Demonstrate leadership in sustainability initiatives that can create competitive advantage
9. Improve employee engagement and loyalty by creating a meaningful workplace culture
10. Attract investors who are looking for socially responsible investments.
But really, once you begin the process, there is no limit to how to use the information.
What does ESG have to do with greenwashing?
If you follow the media or social media at all, you will have recently heard the term greenwashing. You may have also heard the term social washing. And just so you are in the know, there is also bluewashing, weedwashing, rainbow washing, and a few others.
In 1986, Jay Westerveld penned an essay that introduced the term “greenwashing.” He accused the hotel industry of deceptively advertising towel reuse as part of a bigger sustainability initiative. It was when he discovered that its true purpose was to save costs. But no matter which washing is being used, it all boils down to the same action. It is when companies spin their environmental and social initiatives to make them seem more ethical than they actually are.
ESG is a measurement to combat these deceptive practices. Consumers are much more savvy than they have ever been and the blowback from such campaigns can all but destroy a company’s reputation. There is a right way and wrong way to leverage your sustainability initiatives and if you don’t know the difference, then you have just identified a risk.
Terms and definitions of washing
Greenwashing: Greenwashing is a tactic used by companies or organizations to portray their products, services, or policies as being more environmentally friendly than they actually are in order to gain a competitive advantage or give the impression of corporate social responsibility. This can include misleading labels, deceptive marketing practices, and efforts to downplay potential environmental impacts associated with their activities. Examples of greenwashing can include claiming that a product is biodegradable when it only breaks down under specific conditions, or emphasizing a small feature of a product that is ‘green’ but fails to address the larger environmental impact of its production and disposal.
Bluewashing: Bluewashing is a term used to describe the practice of companies or organizations presenting themselves as environmentally conscious without taking any meaningful action that would improve their ecological footprint. It has similar characteristics to greenwashing – deceptive marketing practices, efforts to downplay potential environmental impacts associated with their activities, misleading labels – but instead relates specifically to claims related to water conservation and pollution prevention. Common examples of bluewashing include using imagery of bodies of water such as lakes, rivers, and oceans in advertising campaigns while failing to mention anything about the company’s record on environmental awareness and action.
Weedwashing: Weedwashing is a term used to describe the practice of attempting to mislead customers about a company’s level of commitment towards cannabis reform. For example, this could involve promoting activities such as “corporate responsibility programs” which focus on decreasing drug use but do not attempt to address underlying social issues or refer back in any way to actual reform efforts. This kind of weedwashing does not necessarily mean that the company actively opposes reform but rather that it chooses not to engage in discourse surrounding it due to potentially adverse effects on its public image.
Rainbow Washing: Rainbow washing refers specifically in relation to the LGBTQ+ community. It describes attempts by companies or organizations to pretend they are supportive without actually taking any meaningful actions. It usually involves making public statements expressing support for LGBTQ+ rights whilst continuing discriminatory practices in other areas such as hiring policies or health insurance coverage.
Why do companies disclose ESG?
One of the most important steps in the sustainability process is the disclosure of information. While ESG disclosure was once an optional activity, it is now become essential. If you want long-term competitive success the time is now. Companies choose to disclose information to demonstrate their commitment to sustainability. Some also need to meet regulatory requirements. Others want to receive access to capital markets and improve their risk management strategies. Disclosing this information will help consumers when making purchasing decisions. Therefore it is important to do it right, in line with your results from an ESG Report.
What is compliance with ESG metrics?
For privately held organizations, there is currently no requirement to do any sustainability reporting. Where there is nothing to comply with. However, that is all going to change very soon. But it does not mean that you should not be focusing on ESG measures. It is very important for all companies, regardless of size and ownership structure. Understanding what the key sustainability issues are in your industry will let you develop strategies to address the issues. Performance reviews, executive compensation, and other corporate decisions will soon affected. And again, with social media, it won’t be long before consumers and shareholders start to ask questions.
How does a company prove its sustainability?
Once you begin to ask the right questions and get answers, then you can start to build a sustainability framework. This will include setting measurable goals and objectives, creating action plans, and reporting on progress. It is important to be transparent in your process and report back on your ESG performance within the limits of what you have set out to do. You should also ensure that you are collecting data from stakeholders across all levels of the company. You should also look for opportunities to collaborate with other companies and organizations to share best practices and learn from one another. Finally, you can engage a third party to provide assurance of your efforts. Then share it with the world, or better yet leave it where the world will find it!
In conclusion on ESG investing vs. sustainable investments vs. risk management
Altogether, investing in ESG is proving to be a great move for companies on many levels. Not only does it improve their corporate image, but it also boosts returns and supports sustainable business practices. Companies may not realize how much potential ESG has to increase their value. It will also ensure a livable planet for future generations to inherit. If you have never looked into adopting sustainable practices, it’s not too late. There is actually a better tie than right now. With easy-to-use affordable tools and a user-friendly interface, anyone can do it. There’s never been a better time to start looking into the positive impacts of ESG. If you would like to make an ESG program as a part of your corporate strategy, then let’s chat. We are here to help you learn more about the options and point you in the right direction for you!
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Research & Curation
Dean Emerick is a curator on sustainability issues with ESG The Report, an online resource for SMEs and Investment professionals focusing on ESG principles. Their primary goal is to help middle-market companies automate Impact Reporting with ESG Software. Leveraging the power of AI, machine learning, and AWS to transition to a sustainable business model. Serving clients in the United States, Canada, UK, Europe, and the global community. If you want to get started, don’t forget to Get the Checklist! ✅