The business world doesn’t look the same as it did mere decades ago. Gone are the days of getting ahead by any means necessary. Ruthless is out; compassion is in. But how can that be good business sense? Let’s explore.
Defining ESG
ESG stands for Environmental, Social, & Governance; it essentially refers to how a business approaches the world and its role and responsibilities within the world. ESG shows a company’s investors and other stakeholders that it’s a caring and responsible member of society. ESG policies look beyond profit margins and address the significant issues of the day.
ESG is similar to Corporate Social Responsibility (CSR) but not exactly the same. Nevertheless, they stem from the same vein of leadership. CSR is the business model aspect of creating social responsibility, while ESG is the criteria of standards to evaluate the company’s success and impact in three specific areas.
Environment
The environmental component relies on a business examining its ecological impact. How does it treat the earth? In today’s increasing awareness of the effects of climate change, investors and customers are becoming more averse to supporting any organization that doesn’t look toward the future of our planet.
If a company is known to pollute the air and water or destroy landscapes and ecosystems, people will often choose a company that is friendly to our environment.
Investors will consider how much of a hand a company plays in climate change and whether they are attempting to switch to greener measures.
Social
The social measures essentially boil down to how the company treats people.
Investors and customers care about social justice and diversity, equity, and inclusion (DEI) and want to do business with a like-minded company. When a company stands up for human rights, workers' rights, and fair wages, they are seen as working to make the world better and more equitable.
There is a great deal of turmoil in the world right now; most stakeholders and investors want to see good being done, to correct the things that are wrong. They know that a company is in a powerful position to enact positive change in the world.
Governance
This standard pertains to how the business is run. People don’t often care to associate with a company that isn’t on the up and up and doesn’t practice transparency.
After years and years of dirty business practices that hurt the common person and benefitted the top 1%, people are tired of seeing unlawful business practices. Instead, they want to know what the corporate culture is like. Stakeholders expect a business to be legal and have policies that benefit the entire company, not just the privileged few at the top.
Why Is ESG Important?
For a long time now, companies have played an outsized role in what our society looks like. But, after the past few turbulent years and uncertainty of the state of the world, investors are starting to pay attention. They understand that something like climate change is a significant threat or that even corrupt business practices are a danger, not an asset.
Incorporating strong ESG policies attracts more investors and enhances a company’s profile. For example, an asset management firm called Arabesque noticed that companies with better approaches to ESG had better and more stable stock prices by over 25%.
Running a company isn’t only about finances anymore; today, social responsibility is gaining importance.
How Does ESG Benefit Your Company?
If your company has yet to dabble in ESG policy and reporting, it may seem overwhelming to get started. But start small and build from there, and you’ll see the payoff hit you in a few areas.
- You’ll gain an edge over your competitors who are either without or with not as good ESG as yours. In addition, customers will begin to recognize your brand and have pleasant associations with it. They’ll be more likely to be loyal to your company because they want their money to be used to help improve the world. And as a bonus, new customers will be more willing to give your business a try for the same reason.
- And it isn’t just customers, but investors, too! Investors are savvy and understand that profits follow when your company is giving people what they want. And your investors are people, too, of course. They have the same concerns about the world as your customers do. They also want to be sure their money is going to a conscientious company.
- ESG can help your business decrease its spending. If your company is working toward conservation, that means it will be using fewer resources. Let’s use packaging as an example. Reducing a product's packaging means spending less money on manufacturing that packaging. However, it also means using less energy, water, waste removal, and material; all equals less spending. It may be an initial investment to make the change, but it equates to savings down the road. It’s a more efficient business model and likely a more streamlined process for doing business.
- A good ESG policy may lead to better partnership opportunities. For example, other companies won’t hesitate to associate with you if you have a good reputation, just as with investors and customers. And larger companies that want to partner with a more minor, sustainable partner are helpful in boosting the smaller business’s profile.
- Talent will come knocking on your door, not the other way around. You are better situated to attract a higher caliber of talent through solid ESG implementation. Meaningful work is a common theme in today’s great disaffection leading to record numbers of resignations. After the upheaval of the global pandemic, workers today want to contribute to making the world less terrible. They want to know their work means something more than just a paycheck. A company that is living their personal values helps them feel good about their employment.
Wrapping Up
The size of your business doesn’t matter when it comes to enacting an ESG program. Sure, larger companies may have an easier time making big, bold changes. However, even smaller businesses can take those first steps toward putting their values into the world. One step at a time, change and progress are possible.
