Investors, governments, communities and businesses are coming to the realisation that environmental, social and governance (ESG) factors are not just good-to-haves – they are essential for survival in the sustainable future. This is because not only do businesses need to be more accountable about the ways they are working that benefit staff or the environment, for example, but it is also key to the decision-making process for investors.
ESG has been the topic of many conversations in various industries, particularly in the last decade. Notably, Covid-19 shone the light on the importance of long-term sustainability and resilience.
Companies are scrambling to demonstrate the sustainability of their business practices by ensuring they adhere to high standards of ESG (Environmental, Social, Governance). Yet, while it has almost become a prerequisite for companies to embrace the initiatives, there have been major shortfalls in meeting highly optimistic targets. This has included setting unrealistic targets and not having the right infrastructure in place to deliver the targets set.
This blog discusses the importance of ESG factors and offers a guide to effectively and seamlessly embedding ESG factors into your business.
What are ESG metrics?
ESG refers to the Environmental, Social and Governance components of sustainability. These are types of measures taken into account when evaluating investment options and exploring how sustainable a business is.
The below image presents a breakdown of the acronym:
A considerable number of companies are computing ESG scores to measure their sustainability, taking into account factors such as carbon footprint, energy-saving tactics, staff well-being and staff turnover.
Some accounting firms are also qualified to collate this information. It is likely to be reported in the annual report, press releases, social media, etc, and its publication can be multi-purposeful.
Additionally, ESG metrics can be used by investors to make an evaluation of the future prospects of the firm, becoming a factor in growth projection and modelling when making optimal investing decisions.
KPMG provides a guide to incorporating an ESG lens in business valuation. Of late, company managers are also expanding their view on the periphery of risks and opportunities, particularly those associated with ESG factors.
Why is ESG so important for corporations?
The integration of ESG tends to have a dual effect on companies: first, by reducing risk and, second, by introducing business growth opportunities. The below highlights some of the most important reasons for embedding ESG:
- It is a central focus for investors, particularly those who have high ESG credentials as a requirement, attracting investment.
- Embedding ESG provides a core component of long-term sustainable growth through, for example, reputation and greater efficiency.
- Positive spillover effects on various stakeholders of the firm; this includes greater employee motivation, customer and client satisfaction, etc.
- Higher ESG scores translate into lower cost of capital and thus an increase in capital-raising opportunities.
- Risk management (mitigates regulatory and compliance risk).
As we progress to meet the global goals, such as the Paris Agreement and the mission outlined by the United Nation’s Sustainable Development Goals (SDGs), businesses need to do their part. Those that do not may not only be outcompeted by their rivals, but simply be rendered inoperable. At the least, operations may be curtailed by the stringency of domestic or global regulatory agencies, restricting growth.
How to embed ESG into your business
One of the most fundamental strategies for integrating ESG into a business is building ESG factors into decision-making. As research suggests, it can be a challenge alone to bring an ethics and compliance mindset into ESG before any progressive actions are taken. This can be achieved through developing strong ESG policies and practices and integrating them into the business model and governance structure. Triodos Bank uses its power for good to fund businesses invested in sustainable projects, supporting a project set to reduce the risk of flooding in Lancashire.
Further, engraining sustainability, diversity, inclusion and Corporate Social Responsibility (CSR) into a corporation’s DNA can be achieved by making one of your company’s central values. Read how to make Sustainability a Core Business Principle here.
PwC also suggests strategies, such as embedding ESG metrics into employee and executive compensation schemes. In particular, linking executive pay to ESG goals can be an effective performance motivator for business leaders, paving the way to firm-wide sustainability by projecting issues of ESG across the firm.
Finally, reporting on progress can demonstrate the achievement of measurable goals. This can help boost the motivation of different stakeholders to reach other sustainable objectives. The communication of ESG efforts may not only prevent suspicion of “window dressing”, but will also ensure companies do not fall into the trap of overstating their efforts, proving highly counterproductive. Such reporting may begin with a featured section of the company website that transparently shares where your company is in its ESG journey. At a future stage, you may consider more robust reporting frameworks, such as the Global Reporting Initiative and the Value Reporting Foundation, to identify indicators when reporting annual progress on your company’s ESG issues.
Some of the largest companies in the finance and consulting industries, including BlackRock, Deloitte and various others, are publishing annual or semi-annual updates on their sustainability progress. Using quantitative data succeeds to capture the incremental progress toward company ESG targets, such as percentages, growth rates, etc. These reports are often combined with qualitative information, including quotes from board members and top management, thus credibly communicating the scale of their sustainable actions.
Overall, by taking the small steps towards a sustainable future and focusing on ESG issues, you can ensure that the returns extend far beyond the financial.
We Are OCI
At OCI, we ensure that long-term sustainability is embedded across our business.
We advocate for sound corporate governance and sustainable business practices that result in long-term value creation for our clients. OCI develops by focusing on clients, operating within their risk framework and constantly innovating ways to streamline the business.
Follow OCI on Linkedin at https://www.linkedin.com/company/oci-group for more insights on ESG and sustainability-related issues.