What Is ESG & Why Is It Important For Businesses?
Environmental, Social, and Governance (ESG) is a relatively new governance framework that is slowly but surely making an impact on the global economy. In this blog, we’ll talk about what ESG stands for and why it’s important for businesses; find out more with this guide from Other One.
What does ESG mean: definition, principles & examples
From a top-level perspective, ESG is a set of investment standards that include non-financial risks and impacts. In the broader sense, it’s all of the measures being taken to make environmental and social improvements to the way that organisations conduct global business. As a whole, ESG is frequently used to evaluate how sustainable a company is.
The three pillars of ESG & their corresponding themes
Below, we have detailed the three pillars of this framework, exploring some of the themes that fall under each.
Environmental
How much energy output does a company create?
Are renewable energy sources being used?
Does the company have an excessive carbon footprint?
Is the company pledging to environmental issues such as tackling deforestation, the climate crisis, or reducing greenhouse gas emissions?
Social
Does the company pay its employees a fair, living wage?
Are equal opportunities provided in terms of employment for current and prospective employees?
Does the company have a health and safety policy in place?
Do operations adhere to labour laws?
How does the company give back to the community/its supply chain contributors?
Governance
Is the organisation overseen by an independent, representative board of directors/key stakeholders?
Are shareholder rights protected?
Is the company compliant with regulatory requirements?
Are ethical business practices followed?
Is there a whistleblower program in place?
Examples of ESG
ESG policies come in various forms, and there are different ways to embody each of the three pillars; some are more tangible than others. In some instances, certain values need to be established and committed to over time. Tangible ways to demonstrate ESG compliance include voluntary commitments, such as securing B Corp certification, pledging to support the No Deforestation, No Peat, No Exploitation act, or to new regulations such as the EU’s Corporate Sustainability Due Diligence Directive.
Some changes require an operational overhaul from key figures within the organisation, such as reviewing fair wages, assessing health and safety measures, and following ethical business practice. In other examples, ESG needs to be demonstrated through values that a company proves that it can meet consistently, such as fair recruitment processes.
How does ESG link to sustainability?
ESG has become part of narratives around sustainability because many of the areas covered by the three pillars have either a direct or indirect link to how ‘sustainable’ a business is. The ‘Environmental’ aspect of ESG is directly linked to sustainability, as it concerns things like the carbon footprint of the firm, commitments to climate pledges, and usage of renewable energy sources, The ‘social’ and ‘governance’ pillars approach sustainability from a slightly different angle, giving an insight into how sustainable an organisation is from an operational, employment, and human rights perspective.
What is an ESG score?
The idea of ‘scoring’ an organisation based on its ESG performance has become common terminology, and these values are used by investors to determine both the value and risk that an organisation may pose. An ESG score can be calculated to represent each pillar, or it might be based on specific categories - such as environment, ethics, or operational longevity.
Companies with a low ESG score may, from an investment perspective, be riskier from a financial perspective.
How do I create an ESG strategy?
Crafting ESG policies is often a task for executives within a company, but we can shed some light on the way that this would typically be approached. Given that ESG is made up of the three pillars that we have outlined already, companies need to reflect on the various aspects that each area entails. Approaching this pillar-by-pillar helps to ensure that no stone is left unturned, and each area deserves in-depth reflection.
In terms of practical tips, looking at the EU CSRD’s European Sustainability Reporting Standards provides a broad framework that will cover the majority of things that could possibly be covered by ESG. You could simply go through the list and carry out a materiality assessment to determine what factors are relevant to your business.
The results of the initial findings will provide the skeleton for future improvements, and there may be areas that a business needs to prioritise. For example, ‘Social’ could be a weaker pillar if your organisation isn’t being rigorous enough with inclusive hiring practices, or if the wage that employees receive isn’t meeting minimum standards in your jurisdiction.
What can ESG do for your business?
So what can being a ‘better’ business from an ESG perspective actually do for your business? We’ve chosen three scenarios, all possible when your business commits to a clear ESG strategy.
ESG helps you to meet new global standards
It won’t be long before having good ESG becomes the cost of doing business, as sustainability and ethics standards continue to evolve and choice is removed from the equation. The direction of the world is (for the most part) turning towards better environmental, social and governance policies for companies, so the ESG strategy that you implement now will essentially safeguard your business in the long-run.
Less investment appeal
Not complying with ESG standards can reduce the investment appeal of a company. Investors are becoming more scrupulous about what they inject their cash into, and the characteristics of a “better” investment is evolving the same way our definition of a “better” company is; it’s not exclusively tied to generation of capital anymore.
Identifying a sound ESG investment means quantifying the impact a company makes, and the impression it leaves, on the world. In an ESG world, this cost is built into the monetary value of the investment. Essentially, having an ESG framework in place can mean attracting more money from potential investors.
Staying on the right side of savvy consumers
The “better” business maxim that a company with good ESG is “better” is at its truest in the court of global public opinion, and consumers are becoming more aware of what this translates to in terms of the products they buy, and the brands they favour. Companies ought to know that if they can’t back up their pledges with action, the technology and the will to catch them out are sharper than ever, and their audiences will be the first to wise up to any kind of false ESG act. We’ve already seen similar situations unfold, with B Corp authenticity being one of the most prolific examples. Journalists are also hot on this, and you really don’t want to end up on the wrong side of an environmental or human rights scandal. In some cases, these have destroyed the viability of well established businesses.
The money that consumers spend is the grease that stops the cogs of global business grinding to a halt, and in a society of ‘cancel culture’, being seen as a “better” business that commits to ESG standards will give your business a type of longevity that can’t be bought.
Further your ESG policies with our sustainable copywriting expertise
We’re here to help forward-thinking businesses to utilise their ESG policies effectively, through website copywriting, green messaging, and targeted PR outreach. We’ll help you to build your values into your digital presence, creating a ‘better’ business built on meaningful values that match the modern world. To find out how we can work together, simply contact us today and we’ll be in touch!