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Green commerce models are growing as consumers look to reduce their environmental impact by purchasing used items or renting.
For companies seeking the business of values-led consumers as well as the support of investors, developing an ESG strategy has become a priority. But what is ESG, and why is it so important?
Growing numbers of consumers and investors evaluate brands based on their environmental and social values. ESG policies and practices demonstrate a company’s values, commitment to action, and transparency.
What is ESG?
ESG stands for Environmental, Social, and Governance. It’s a framework, which includes a set of criteria that is used to evaluate a company’s operations with regard to its sustainability and ethical impact. The ESG framework ensures that corporate responsibility is practiced and reported with transparency.
There are three main pillars used to evaluate a company’s operations with respect to sustainability and ethical impact:
- Environmental (E): this criterion examines how a company performs as a responsible steward of the environment. It includes factors like energy use, carbon emissions, waste management, pollution, resource depletion, and efforts to combat climate change.
- Social (S): this measure assesses how a company manages relationships with employees, suppliers, customers, and the communities where it operates. It covers aspects like labor practices, diversity, equity and inclusion, human rights, and community engagement.
- Governance (G): this standard involves the practices and policies that guide a company’s leadership, executive compensation, audits, internal controls, and shareholder rights. It ensures transparency, accountability, and ethical behavior in corporate governance.
Investors increasingly use ESG criteria when choosing which companies to invest in, seeking to enact their values by supporting organizations that are committed to being good stewards of the environment, socially responsible in terms of diversity, equity, and inclusion, and practice ethical and accountable governance.
A global survey by PwC found that a majority of consumers are more likely to buy from brands that share their values across the three elements of ESG.
Moreover, 76% of the 5,005 consumers polled said they would stop buying from a brand that treats employees, the environment, and the communities poorly.
Why is ESG important?
Businesses are keenly aware of the need to take a stand and openly declare values, commit to action, and follow through with transparency.
According to the PwC study, 91% of more than 1,200 business leaders polled believe their company has a responsibility to act on ESG issues.
By developing an ESG strategy, incorporating it into corporate governance and practice, and providing regular ESG reporting, a company demonstrates how it’s putting its words into real action.
Although ESG and sustainability are related, they’re not interchangeable. A thorough ESG strategy can create and enable sustainability as a by-product of successful execution.
How to embed sustainability in your business – and bottom line
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Examples of ESG policies and practices
Broken down categorically, ESG criteria generally include policies and practices designed to have real-world impact.
Environmental impact:
- Climate change and carbon emissions – minimize the company’s carbon footprint
- Air and water pollution – keeping it clean downwind and downstream
- Biodiversity – support the ecosystem rather than disrupt or destroy
- Renewable energy – use and/or produce clean, sustainable energy
- Deforestation – leave the trees; keep the Lorax happy
- Energy efficiency – minimize waste and maximize renewable energy
- Waste management –cleaning up properly and safely
- Water scarcity – don’t deplete natural resources
Social impact:
- Customer satisfaction – keep customers happy; no customer, no business
- Data protection and privacy – take care of customer data; it’s the right thing to do and it’s the law
- Gender and diversity – strength in diversity, equity, and inclusion in the workforce and ecosystem
- Employee engagement – take care of your people; listen to them and support them
- Community relations – support the community that supports your business; encourage employees to volunteer and serve
- Human rights – stand up for those who are oppressed; stand for human dignity and human rights
- Labor standards – foster a safe, healthy, fair, and productive workplace
Governance framework and structure:
- Tax strategy – pay your fair share
- Executive remuneration – fair, reasonable, accountable compensation
- Donations and political lobbying – play fair, don’t buy favors or bully away healthy competition
- Corruption and bribery – root it out, hold people accountable
- Board diversity and structure – representation matters
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What are the benefits of ESG?
The benefits of ESG investing include reduced risk of a company suddenly losing value or collapsing when illegal, unethical, and risky business practices come to light and cause scandal and potential bankruptcy.
A company that adheres to its ESG strategy may be more likely to produce long-term sustainable value and returns on investment.
Additionally, investors can better choose companies more likely to have a social and environmental impact that aligns with their values, allowing them to contribute to real-world influence and positive change.
This impact can take the form of the way the company manages its supply chains. For example, it may work with fair-trade suppliers, transportation and delivery companies committed to reduced carbon emissions, and partners engaging in fair labor practices.
ESG reports provide investors and stakeholders with this kind of information on which to base their decisions alongside other business initiatives to create value.
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How does ESG create value?
Although some ESG investors are more tolerant of slower or lower growth when buying into a company that aligns with their ESG criteria, they still expect to see a return on investment and want the company to make smart business decisions to increase revenue and profit.
If meeting ESG criteria sometimes causes slower growth by not cutting corners or taking excessive risks that may be unethical, irresponsible, or illegal, how do ESG-focused companies drive value creation for itself and for its investors?
A McKinsey report found that ESG strategies often catalyze growth and value creation.
First, some of that value creation for both the company and its investors comes from avoiding the risky practices that can end up tanking share prices or sinking a business into bankruptcy.
Companies working toward greater sustainability naturally end up reducing costs by increasing efficiency and reducing waste. As processes and practices become more efficient, employee productivity tends to increase as well.
Employees who can show up as their authentic self and enjoy the psychological safety of an equitable and inclusive workplace tend to be more creative, innovative, and productive. Effective ESG strategies boost employee productivity and morale, and positively impact a company’s financial performance.
According to McKinsey’s study, ESG strategies tend to propel businesses toward greater top-line growth by opening new markets and expanding market share in existing ones.
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Bottom line
It may seem simple, but it often boils down to this: Being a better corporate citizen and respecting and protecting people and environments opens more doors and generates more good will.
That means more business opportunities than a company with a weak or nonexistent ESG strategy.
Today, business success depends on more than technological advancement and operational efficiency. It also depends on evolving socially and ethically to gain the trust that drives long-term growth.
