What is ESG?
Environment, Social, Governance (ESG) is a big topic of conversation with companies and investors, and is interestingly leading to improving employee engagement and corporate culture. Businesses are turning ‘green’ and only for the better! Have you started witnessing that investors are preferring green companies over companies that do not have green initiatives? Well, that is what the market dynamic has changed to now.
Companies are developing ESG strategies to enhance their financial growth and goodwill in the industry. So, what is ESG exactly? Is it an objective, framework, measure or non-financial criteria? ESG is actually a mix of all!
Broadly, ESG is termed as the sustainability measure of an organisation that helps them become conscious consumers by lowering a business’s carbon emissions, investing in environmental protection, people consideration, board composition and more. Any company following the ESG criteria must meet certain environmental, social and governance regulations. Such companies also work in support of the green finance regime launched by the UK government in 2021.
The three pillars of ESG comprise:
- The Environmental aspect, focuses on the impact of resource consumption in the environment, like the level of a business's carbon footprint, waste discharge, water usage and more.
- The Social aspect, focuses on a business' interaction between employees, communities, stakeholders and more, alongside strengthening its labour, diversity & inclusion, Corporate Social Responsibility (CSR) and similar policies.
- The Governance aspect, focuses on policies related to legal compliance and the processes that help organisations take effective decisions.
Did you know that the Isle of Man has been a UNESCO Biosphere since 2016? Under this status, businesses in the country are committed to:
- protecting natural resources,
- developing the economy sustainably,
- making a positive environmental impact,
- promoting the country's cultural heritage, and
- engaging with the local community.
The importance of ESG for companies and investors
You might think that only giant corporations or multinationals can undertake ESG policies. Well, that is not so. Consumers across industries have started demanding better employment and sustainability standards from all businesses, irrespective of their size.
In fact, small businesses following ESG policies can benefit quickly due to their flexibility and quick decision-making process. On the other hand, medium to large companies can enjoy more accessible and higher flow of costs that go into shifting from a non-eco-friendly company to a green company.
So how does one embark on the ESG journey? Organisations can start small by adopting green packaging, using renewable energy and practising effective waste and water management techniques, as a first step towards reducing their carbon footprint.
Then, actions like facilitating top-line growth, minimising legal interventions and focusing on cost reduction can also benefit businesses in the long term.
From an investor's point of view, investing in companies having high ESG standards contributes to the investor's market goodwill and profitability. The last few years have seen most investors becoming very interested in green companies because they can be more successful and profitable in the longer term. According to a report, green companies offer a higher return on investment than non-green companies.
How ESG creates value?
There is actually more value behind ESG than meets the eye. Because let’s be honest, how can we precisely calculate the positive environmental, social and legal impacts of businesses?
Various business reports have indicated that companies following ESG regulations perform better financially. They also report having higher optimisation, greater employee productivity, lower volatility and reduced costs. In fact, start-ups find it easier to convert potential investors into stakeholders if the company implements its ESG policies successfully.
According to some reports, businesses that have still not adapted to ESG policies have been performing a lot lower than the companies that have. Non-green companies have noticed higher capital costs, greater volatility, legal complexities, employee dissatisfaction, and several governance irregularities.
How should you start?
A business wanting to embark on an ESG initiative should follow a specific methodology that focuses on sustainability and ESG regulations. It can start by assessing its current position concerning ESG measures, the progress and where it needs to move ahead. Here is how you can define your ESG methodology:
- Identify the priority areas that ESG needs to focus on;
- Ask investors, stakeholders and consumers what they think is the business's current ESG position;
- Learn about ESG frameworks, regulations, standards and policies;
- Align these policies with the company's activities;
- Allocate business resources to the strategy;
- Ensure that the ESG strategy you devise meets the governance and operating model of the nation's compliance;
- Constantly update yourself about the changing needs of investors and any relevant requirements and regulations; and
- Collaborate with other businesses in the industry;
Once you incorporate ESG policies, businesses can grow in a diversified and equitable manner. The impact on local communities and employees results in positive business progression. This is measurable and visible in the company's annual sustainability reports.
Conclusion
It is time for businesses to incorporate ESG policies into their operations, irrespective of size or industry. Adopting the policies will help small, medium and large corporations adapt to the dynamic compliances that favour environmental, social and governance-related matters. When businesses become associated with ESG, their goodwill and brand recognition will improve.
With customers becoming more conscious about society and investing in society-friendly products, adopting ESG policies helps to promote brand loyalty. All in all, ethical production is important because it ensures that sustainability is recognised as much as profitability.