What is ESG and Why Is It Important?

Environmental, social and governance issues have grown significantly in importance within companies, and are continuously affecting their decision-making processes, both for the company itself, as well as for its investors. 

ESG, as mentioned above, stands for Environmental, Social and Governance and it refers to the way in which businesses incorporate environmental, social and governance practices into their operations, while also enabling the measurement of these factors in terms of the business’s impact on the environment and the society. Along with that, ESG helps indicate and signify how transparent and accountable a company is with its practices. 

Currently, ESG is considered to be a significant component in a company’s future growth, since investors, employees and customers all want to engage with businesses who uphold ethical standards and are transparent with their operations. Therefore, utilising ESG for businesses is vital for their development.

But let's break down the ESG components even further in order to understand what they focus on and reflect.

Environmental: 

The environmental component of ESG focuses on the effort a business puts into minimising its impact on the environment. It can reflect on anything from the business’s services and products, to the supply chain and its in-house operations. Through reflection of a company’s Environmental practices, more sustainable and ethical practices can be adopted, significantly reducing a company’s environmental impact.

Such environmental business practices can include any of the following:

• Being a net zero organisation by reducing energy usage and embracing renewable energy sources. 
• Where applicable, choosing to switch to sustainable packaging from biodegradable material, in order to have zero-waste products.
• Converting to LED lighting in an effort to reduce the company’s carbon emissions. 
• Encouraging recycling within the company. 

Social:

The social component refers to the way in which businesses impact workplace culture, along with the wider society. Through consideration of social factors, businesses can provide a positive contribution towards fairness in society by investing in fair and equal opportunities and working conditions for employees, as well as for individuals in the local community.

Fairness and equality are vital elements for ethical social business practices and can include:

• Safeguarding customer data. 
• Incorporating diversity and inclusivity policies within the company in order to promote equality. 
• Preventing the abuse of employee labour rights, refering to issues such as modern slavery.  
• Providing employees with the necessary training and support, while also promoting and supporting employee health, safety and wellbeing.
• Supporting local community projects, an example of which could be the funding of educational incentives.

Governance:

Processes such as decision-making, reporting and the general logistics of running a business make up the Governance component of ESG, while also reflecting on the business’s ethical behaviour and its transparency with stakeholders in regards to its activities. 

Governance practices examples may encompass: 

• The accurate reporting of the financial performance and business strategy of the company to stakeholders.
• The ethical running of the business, including the prevention of bribery.
• Ensuring that the business’s managers and leaders take accountability in reference to performance and risks. 
• Establishing diversity within the leadership team of the company. 

Establishing good governance and the adoption of ethical practices can prove worthwhile for any business, raising investor appeal and enabling the business’s growth, for a long period of time.

So, why is ESG important? 

As mentioned above, adopting an ESG framework for your business can generate great benefits, raising the business’s credibility. More specifically, the consideration of ESG issues can positively impact a business, encouraging future investors to engage with the company, ultimately raising its capital and overall value.

Generally a well established and updated ESG can:

• Improve the company’s reputation 

As this suggests that the company has adopted a transparent plan that focuses on helping the environment, supporting diversity and equal opportunities in the workplace, as well as ensuring the most ethical business practices and decisions are adopted, it can significantly raise your company’s reputation.

• Help reduce costs

Through initiatives that help in reducing waste and the amount of materials used, in addition to actively reducing energy costs through switching to LED lighting for example, ESG can also help a business minimise its running costs.

• Attract employees and customers

Many employees prefer to associate themselves with companies which encourage and promote a diverse and inclusive workplace through employee support programmes that cater for mental health and wellbeing, together with fostering improved work/life balance. A significant proportion of current employees also choose to associate with companies that are prominently eco-conscious. 

A study found that over 70% of customers are willing to pay an additional 5% for a greener product that meets the same standards as the non-green alternatives that are available. As a result, this can attract even more customers to the business, raising its brand equity, along with its profit.

• Secure Investments

Investors are also often attracted to companies with a strong ESG. According to a survey conducted by Naxitis, an investment management firm, a global average of 71% of investors stated that they want to make a positive impact with their investments. 

Thus, taking into consideration the ESG concerns of your company can greatly enhance its position in the market, compared to that of competitors, while eliminating the possibility of negative perceptions towards the company and its brand. 

Are you a senior executive looking to further develop your career and effectively contribute to your company’s ESG? Enrol with us today on a 100% online Environmental, Social and Governance course.