What is ESG and Why Your Business Should care
This article will be broken down into a three-part series. Part one will define ESG and its different use cases, part two will explain how these different use cases can lead to financial gain, and part three will dive into how EPM tools such as Anaplan and Workiva can be used to track ESG metrics and reporting.
As the world faces global sustainability challenges such as climate change, flood risk, demographic changes, and the impact of the Global pandemic metrics that prioritize social vs financial reporting are becoming increasingly important when evaluating company performance. Environment, Sustainability & Governance (ESG) analysis has leaped from a corporate nice-to-have to a requirement for companies to disclose. Investors are no longer only concerned with maximizing shareholder wealth but are becoming more interested in how well their investments impact the world. Businesses have noticed this and have begun reporting more on ESG as a result. Governance & Accountability Institute (G&A) research team determined 86% of the companies in the S&P 500 Index® published sustainability or corporate responsibility reports in the year 2018.
Incorporating ESG into business plans will allow for companies to meet both shareholder and societal expectations, which will lead to long term sustainability. Before we can explain how measuring these components lead to sustainability, we first need to define these ESG components.
Environmental Criteria
The Environmental factor in ESG focuses on how a company’s affairs affect the ecosystem around them. Investors will look at how the company uses natural resources and how their daily operations impact the environment. Areas to look at while evaluating your company’s environmental profile are and not limited to climate change, waste & pollution, natural resources, and supply chain.
Imagine being a business executive for a beverage company who’s recently come under scrutiny for plastic pollution. Tracking your pollution metrics through ESG reporting would allow for your company to stay ahead of this risk. Would you rather extinguish a fire or prevent one from ever happening?
Social
The social criteria examines how a business manages relationships with employees, suppliers, customers, and the community it operates with. When a company makes a business decision to improve profitability an executive should ask themselves does this have a negative impact on our company’s social perception. News travels fast with the power of social media Twitter posts mentioning ESG topics grew 19x over the last five years and are becoming more ‘trendable’. In just a matter of seconds a bad business decision can reach millions of people and the relationship with your community could be damaged.
It is important as a company for their executives to stay up to date with current events and take action to minimize any risk that may arise. Areas to look at while investigating the social component of ESG are supply chain, employee wages, diversity, and health benefits. As an executive it is important that you align with the community you serve. Put yourself in the shoes of the consumer, how would you react if you found out that the product you purchased had a negative impact on your community?
Governance
Corporate governance examines a corporation’s purpose, the role and makeup of boards of directors, and shareholder rights. As a company it is important members of the board to understand benefits of ESG reporting and transparency. According to the Harvard Business Review a survey of 1,188 board members from fortune 100 companies’ credentials were analyzed and found that only 29% of those board members had any ESG expertise. Do you know how many of your board members have ESG related expertise?
A company that has a strong sense of ESG will know the importance of having an open line of communication with their shareholders. Are your companies’ shareholders voting on important decisions? If not, a company should ask themselves: are we including the voice of our shareholders and community in our decisions? As a company executive you should strive to have a diverse board, corporate transparency, and a mission that serves your investors and surrounding community.
The theme of ESG has been understanding and collaborating with consumers/investors on business decisions. Part 1 of this article series was defining the 3 components of ESG and how they can translate to your business. As we continue to part 2 of this series, we will discuss the different ways that these components can be measured and quantified to achieve long term sustainability.
