What is ESG & Why It’s Important

ESG

Environmental, Social and Corporate Governance, better known as ESG, has been making quite a splash in the business world these days.

Investment in ESG by companies in a wide array of industries has been on the rise in recent years, particularly following the emergence of COVID-19 pandemic, event that has shone a spotlight on the growing connection between sustainable development and financial results.

Investors, customers and other interested parties have shown growing interest in ESG-related issues, pushing companies to pay greater attention to many 21st century topics that might not have been on their radar years ago.

In a few words, ESG refers to those metrics for assets within an institution that are intangible and non-financial in nature.

As its name implies, it is composed by three overarching themes: the environment, society and corporate governance. In other words, issues related to social responsibility and sustainability as a whole.

Companies will report or disclose data on what they are doing in each of these categories for the benefit of their stakeholders and customers. Many of these figures have been incorporated into the company’s annual report and are presented to investors, customers and the general public on a yearly basis.

In many cases, ESG issues fall into all three categories. Sometimes, it may be difficult to assign one category to a particular issue as it may spill into one or the other.

Environmental issues relate to the preservation of the natural world and how companies manage the impact they have on the environment. This category may include things such as climate change, CO2 emissions, air and water pollution, biodiversity, deforestation, using energy and water in an efficient manner, and managing waste properly.

Social issues have to do with individuals, their quality of life and relationships and how a company builds its people and overall culture. This category covers customer satisfaction, data protection, privacy, gender equality, diversity in the workplace, social responsibility, human rights, interaction with the community and strong labor standards, to list a few.

Finally, Corporate Governance deals with boardroom issues and what it requires to run a company from the top. It will incorporate items such as board composition, bribery and corruption, lobbying, whistleblowing, contributions to political campaigns, and compensating company executives, among others.

So why should a company focus on ESG? What are the benefits to be drawn from investing in ESG?

Helps with Branding

One of the most obvious benefits from investing in ESG comes in the shape of branding and how society as a whole views your company.

Companies who take care of their employees, promote diversity and gender equality in the workplace, protect the environment and give back to their local community draw greater attention to their services and products.

Investors who have a great concern for these issues and customers who want to deal with companies that care about them, the world and its future are more likely to spend their money in companies that have a strong ESG program in place.

Similarly, by focusing on these issues in a proactive manner, companies can avoid difficult challenges posed by activists who may be looking for a greater commitment towards the environment, gender equality and diversity in the workplace, LGBTQ issues, you name it.

Finally, companies that make ESG a priority are more likely to appeal to and keep the most talented employees. Fact is people want to work for a company that cares for them, their surroundings, their community and the environment. Setting up a strong ESG framework can build plenty of loyalty among employees.

Jim Hoff, senior partner at Aon, summarizes this last point nicely: “Effective and visible ESG practices are increasingly important to an employer’s brand. The best people seek out employers with demonstrated resilience and sustainability as key components of the employment value proposition.”

Builds a Strong Infrastructure

COVID-19 has rocked the foundations of life as we know it, both for individuals and companies.

As a result, more companies have been investing in ESG programs with sight to the future.

According to Ernst & Young, “strong ESG programs may help buffer the impacts of the current crisis, hasten recovery, spur innovation needed to navigate a “new normal” and reduce risks to additional crises in the future.”

Meredith Jones, a partner and global ESG practice lead at AON, concurs with the Big Four.

“There are more than 2,000 studies that show that companies with strong ESG practices – meaning that companies identify, address and mitigate these risks successfully – produce better corporate financial performance,” she says.

Furthermore, she adds, “Looking at historic bankruptcy and stock volatility data, there is also strong evidence that those firms may also be more resilient.” 

Boosts a Company’s Value

According to Sphera, a company offering ESG software, data and consulting solutions, investing in ESG is beneficial to the long-term growth of a firm.

For instance, Sphera explains that “private investors have realized that investing in companies with a robust and convincing ESG strategy positively affects ROI, reduces lending and revenue risks.”

Furthermore, how a company performs in terms of ESG “[shows] investors a company’s efforts to mitigate risks and generate sustainable long-term financial returns.”

Finally, analysis has demonstrated that companies “that have successfully implemented sustainability and ESG strategies tend to outperform the other top global companies.”

Similarly, Betsy Atkins, President and Chief Executive Officer at Baja Corp, a venture capital firm, suggests that a strong ESG framework can build greater stock value.

In an opinion piece for NASDAQ, Atkins writes: “Investment research and consulting firms like Sustainanalytics and MSCIhave developed indices that measure and rank companies based upon ESG criteria relative to their industry peers. The investment funds and ETFs that benchmark these indices are raising trillions of dollars to be deployed toward companies that execute sound ESG policies; these are long-term oriented shareholders that can potentially fuel demand for your stock.”

Has your company embraced ESG? What are some of the things you are doing to boost activity in this up-and-coming sector?

Feel free to share your thoughts with us in a comment!

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