‘ESG’ has become one of those phrases everyone throws around in boardrooms and investor meetings. But what exactly does ESG mean? And why do ESG credentials matter to your business?
In simple terms, ESG stands for Environmental, Social and Governance. Your ESG credentials are a rating provided by various standards agencies that demonstrate how seriously your company takes its impact on the planet, its impact on people and its ability to govern itself.
ESG credentials are becoming more commonly used by investors, recruiters and clients as a way of judging a company’s ethics and reputation. They are an additional symbol of trust alongside reviews and awards that all companies can benefit in striving for.
In this post, we’ll break down what ESG really means, how it’s measured and why it matters so much now.
Understanding ESG: Environmental, Social And Governance
Environmental
The environmental pillar focuses on how your business affects the planet. This includes various factors such as:
- Energy use and efficiency
- Carbon emissions and climate impact
- Waste management and recycling
- Water usage and pollution
- Supply chain environmental impact
Companies are expected to set environmental targets and make changes that help to reduce damage to the environment. This can include a variety of different green improvements such as:
- Improving building insulation or making HVAC upgrades
- Investing in commercial solar or another renewable energy source
- Reducing single-use plastics and switching to recyclable or biodegradable packaging options
- Implementing responsible sourcing policies for raw materials (such as sourcing timber from sustainable forests)
- Donating money to environmental initiatives
Some of these changes can help your business to save money while also saving the planet. They may also help you appeal to eco-conscious customers and shareholders, while also helping you to stay compliant with environmental laws.
Social
The social pillar looks at how your business treats people. This includes various parties affected or involved in your business including:
- Your employees
- Your customers
- Your local community
- Your choice of suppliers
This is where elements like staff engagement, fair working conditions and diversity and inclusion come in. A strong social performance shows that you are people-focused and not just profit-focused. Social improvements that your business can make include:
- Implementing a fair hiring system that factors in diversity and inclusion
- Reviewing pay structures and reducing any inequality
- Providing health and safety training, skills development and mental health support
- Taking steps to protect customer and employee data and providing control on how this data is used
- Supporting local community projects and charities
Strong social policies can often improve productivity through lower absenteeism, increased customer/employee loyalty and a better overall reputation. They position you as a kind and understanding business that aims to make the world a better place for everyone.
Governance
The governance pillar is about how your business is run and how transparent and ethical your decision-making is. This covers elements such as:
- Board structure and independence
- Executive pay and incentives
- Anti-corruption and anti-bribery policies
- Risk management and internal controls
- Transparent and accurate reporting
Good governance builds trust with investors, regulators and the public by showing that your company is managed responsibly. A few ways in which you can improve governance within a company include:
- Ensuring your board has the right mix of skills, experience and independence
- Publishing clear policies on bribery, fraud and whistleblowing
- Regularly reviewing various risks within your business such as cybersecurity
- Being open and honest in reporting work progress and figures to customers and stakeholders
- Using ethical marketing and pricing tactics (e.g. not making false claims, not faking reviews and not price fixing)
Good governance reduces the risk of scandals, fines and lawsuits. It is essential for not just keeping a good reputation, but also preventing a toxic work environment and saving you money spent on penalty payments.
How is ESG Assessed and Measured?
A growing number of agencies and organizations now exist that assess companies’ ESG performance. They look into public disclosures, reports, policies and direct data to generate a score or rating.
Top examples of ESG providers include:
- Sustainalytics
- Bloomberg ESG data
- CDP
- ISS
- MSCI
- RepRisk
Each of these organizations judges different criteria – with some focusing more on a specific pillar like environmentalism. Investors, lenders and corporate customers then use this data to evaluate the profile of a business.
It’s worth noting that there are also many well-known certifications which – although not provided by traditional ESG agencies – have a similar impact. These include:
- Fairtrade
- B-corp
- Rainforest Alliance
- Carbon Trust
Why Do ESG Credentials Matter?
ESG credentials are increasingly becoming an alternative ‘credit score’, with investors and lenders using them to evaluate the risk of giving money to a business. Some banks even have ESG policies that directly exclude companies that don’t meet certain standards. Not improving your ESG rating could result in reduced access to capital or higher borrowing costs.
When it comes to attracting customers, ESG can also have an impact. While regular consumers may not look into your official ESG rating, it is something that B2B customers are increasingly doing before signing big contracts. Your ESG credentials can also be used as a marketing strategy to build trust and win over new customers – things like sustainability, good working conditions and transparency all make people more willing to buy from your business.
Some employees may also care deeply about your ESG commitments. It could affect your ability to retain good workers and also to attract the best talent. General morale is also likely to be improved by thinking about your ESG – employees are likely to be happier and more productive knowing that their rights are protected and that their company is honest and eco-friendly.
Constantly improving ESG credentials can also help you to keep up with changing legislation. Every year, new laws are coming in to force companies to be more environmentally-friendly, more socially responsible and more ethical in their governance. Taking voluntary steps to improve keeps you ahead of these laws so that you’re not having to quickly implement changes before a deadline. You may even help to set an example that inspires regulatory change across the board.