Guest Post Written By Polly Baxter
Environmental, social, and governance (ESG) business standards have become popular buzzwords for climate activists and corporations alike. But what do they mean? ESG is the promotion of accountability among businesses and organizations for the impact that their business operations have on the environment, society, as well as their workforce. Simply put, ESG standards aim to make businesses more socially and environmentally responsible.
During the World Economic Forum Annual Meeting 2023 in January, over 130 companies will have included the Stakeholder Capitalism Metrics in their annual and sustainability reports. These metrics take a look at four pillars: people, planet, prosperity, and principles of governance. This will be measured around greenhouse gas emissions, pay equality, board diversity, and others. As the world becomes greatly affected by global crises, organizations and business leaders are under more pressure to zero in on sustainability efforts that drive real impact. The Stakeholder Capitalism Metrics is only one such initiative among other ESG strategies. This post will look at how businesses can benefit from ESG more broadly and how best to boost ESG efforts.
How can ESG benefit a company?
The primary focus of ESG implementation should be on the environment and the people likely to be affected by business processes. Yet organizations also reap benefits. Organizations can derive value by integrating ESG strategies throughout their business.
These benefits include:
Employee attraction and retention
With more people showing interest and priority for sustainable business operations, organizations face more pressure to implement ESG in their business strategy. 81% of executives surveyed reported that new roles and responsibilities have opened to assist with ESG requirements. This aligns with survey results indicating that 25% of employees consider switching their current jobs to work for a more sustainable company.
Increased efficiency and ROI
Along with improvements in talent attraction, retention, and engagement, 52% of the executives surveyed believe that increased efficiencies and return on investment (ROI) are key benefits to ESG reporting. By studying ESG data well, businesses can improve their operations and their financial outcome as a result of new insights. Sustainability reporting standards — such as the Stakeholder Capitalism Metrics mentioned above — can provide organizations with information that helps measure performance and allows them to see what they can further invest in. At the same time, improved data quality can also help businesses create a loyal customer base, driving sales.
What has ESG accomplished?
Discussions about the true impact and value of ESG can be complex. As listed above, prioritizing ESG can benefit businesses and their employees while addressing the concerns of activists and consumers worried about climate change. Giving businesses a social purpose has helped create partnership opportunities and sustainable working conditions for everyone involved, and in doing so, allows ESG companies to better navigate economic mishaps. Some argue that ESG strategies may not bring the necessary impact needed to accomplish real change. Certainly, ESG cannot solve global social and environmental problems on its own—it is one point of leverage among many.
What are some limitations of ESG?
As the ESG ecosystem is still relatively new, asset owners and managers have reservations about its investment process. One such reservation is that not all ESG factors are easily quantifiable. As a result, businesses have a hard time connecting ESG results and financial performance. Due to the lack of a centralized source of financial and sustainability data, companies may be unsure of the impact of their ESG actions on their business performance. At the same time, there are concerns about how expensive sustainability initiatives may become in the long-term and if they pose risks to a business in the short-term. Due to its infancy, these ESG fears and limitations aren't unfounded.
How can a company boost its ESG efforts?
Some worry that investments in ESG integration may get in the way of profit generation for organizations. However, as we've mentioned, prioritizing ESG integration can be as beneficial for businesses as it is for the environment and society. Aligning ESG factors with business strategy can promote sustainability, and relying on proper ESG data can help companies understand their sustainability initiatives' direct impacts. Including ESG data in a company's performance management can help businesses become more agile against changing regulations and see the effects of ESG activities on financial and operational plans. So how can a company integrate ESG into the core of its culture?
Here are some possibilities:
Assign a chief sustainability officer (CSO)
Integrating ESG efforts internally is just as crucial as producing sustainability reports to comply with laws and regulations. To drive action in the real world, it's essential to make the necessary internal changes. This is why chief sustainability officers (CSOs) are must-haves in organizations today, as they are the "glue" that helps embed sustainability throughout company strategy and across departments. CSOs work with executive boards in organizations to help corporations drive change and ensure compliance within regulatory frameworks. Today, they have become "change agents" necessary for sustainability initiatives within business processes.
Invest in proactive sustainability efforts
Lastly, some organizations can adopt innovations to address one environmental problem — but fail to see how these investments can create new ecological issues in the process. We discussed this in our post on the power of innovation and investment, and why shifting away from merely adopting reactive technologies can be more beneficial in the long-term. Instead, investing in proactive efforts can make a more positive and lasting impact on the environment and society.