What is it?
According to Gartner, ESG is the environmental, social and governance “criteria that assess the robustness of a company’s governance mechanisms and its ability to effectively manage its environmental and social impacts. Institutional investors, stock exchanges and boards increasingly use sustainability and social responsibility disclosure information to explore the relationship between a company’s management of ESG risk factors and its business performance.”
E is for environmental – the company’s impact on the planet, think use of energy and natural resources, waster production and treatment, pollution output and any impact on the environment, plants or animals. ESG forward companies measure these outputs and develop action plans to reduce their impact on the environment.
S is for social – how companies interact with employees, customers, partners and the communities in which they conduct business. Think salaries, workplace safety and diversity and inclusion (D&I).
G is for governance – the company’s leadership team, executive pay rates and investor relations are on the radar here. Think practices that develop an ethical and transparent governing system.
Which part of the business is affected by ESG?
Supply chain
The pandemic put a big spotlight on the efficiency of supply chains and exposed weaknesses such as lack of transparency and poor compliance structures An ESG strategy will strengthen supply chains by: tracking supply chains for ESG requirements, reducing a supply chain’s impact on the climate and environment, looking at partner compliance via fair labor practice as a few examples
Carbon emissions
Companies are making plans to measure/establish targets for and to reduce greenhouse gas emissions. The aim is to reach net-zero carbon emissions a goal for even heavy carbon emission contributors. There is no sitting back for anyone as the shift toward more energy-efficient operations is well under way.
The pros and cons of ESG
It attracts talent
Who doesn’t want to work for a company that contributes towards reaching wider societal goals? This is a view many employees take when it comes to companies they want to work for, having a robust ESG strategy will bring the best talent to your door. That brings us on to DEI (the diversity, equity and inclusion) part of ESG. Getting this right is not without its challenges as some critics say not enough is being done to level the playing field! When done correctly companies can attract top performers from all backgrounds, enjoy retention and job satisfaction, increased revenues and share values.
Increasing role in finance
Organizations with a strong ESG focus attract investors and there is a strong correlation between high ESG scores and revenue increase. Alongside traditional financial metrics, ESG is considered a standard tool for financial analysis.
An opportunity to build consensus
The appetite for taking environmental action in the corporate sector is rising, it is a good time to solidify ESG practices. The turmoil in Russia and Ukraine and recession threat has magnified the need for security, reliability and sustainability.
Conflicts with digital transformation
Tech leaders worry that the focus on ESG and DEI puts other areas of digital transformation that are crucial to their overall productivity and performance, in the back seat. This is not really a concern especially as both initiatives are critical to meet stakeholder needs. Plus, the fact that specific softwares exist designed to help organizations meet their ESG and DEI goals, makes that point moot!
A twist of the arm?
Cynics might say that there is pressure on the C-suite and board to commit to ESG goals especially when the US Securities and Exchange Commission (SEC) appointed Satyam Khanna as the first ever policy adviser on climate in 2021. This meant companies’ BCM and disaster recovery plans were being reviewed in light of extreme weather impacts. Reviews of corporate climate-related financial disclosures were being made.
In the end, companies that commit to ESG and DEI foster stronger fairness, inclusivity, reliability, safety, transparency, privacy and accountability and is a litmus test of their success.