What is ESG, and Why is it Important?

Today, companies have an expectation from both their customers and society at large about how they should contribute positively toward solving some of the planet’s biggest challenges like poverty or climate change. 

Businesses and brands are expected to not only take action to minimize their negative impacts but also be proactive in addressing social issues and understanding environmental concerns.

Sustainability is a key to long-term success in business. By combining environmental, social, and governance aspects with economic goals, businesses are able to create more value for themselves and their customers – value that will last well into the future. 

While sustainability has been an issue on people's minds over the years – the global climate change agreements have made this clearer than ever before through their scale and scope – it cannot be emphasized enough just how crucial sustainable practices are going forward when it comes to investments in any kind of company at all levels across industries worldwide.

This is where ESG (Environmental, Social, Governance) comes into play. Let’s take a closer look at what each of these three terms means. 

ESG’s Three Pillars: Environmental, Social, Governance

There are three major pillars of ESG: Environmental, Social, and Governance.

E – Environmental 

In the ESG, the E stands for the world's most important concern of the 21st century – the environment. Companies' energy use and environmental footprint have a big impact on society and the planet.

S – Social 

The social impact of a company's culture on the people and community is often not immediately observable, but it shapes how sustainable that future will be. It may take a while for these impacts to manifest themselves in tangible ways, such as more diverse representation at work leading to improved creativity and better decisions; however, they are integral parts of an ESG framework. The ripple effects from inclusive cultures are what make companies great places to work.

G – Governance 

This criterion involves two parts. One is staying ahead of violations, ensuring transparency and industry best practices, and interacting with regulators. It also refers to the internal system of controls, procedures, and practices used for governing and making effective decisions.

Why is ESG Important?

Companies must be more transparent about their sustainability efforts and create a sustainable strategy for the future. Investors, customers, suppliers, and employees are all calling on companies to do more around key sustainability topics like climate change or equality in the workplace. Furthermore, investors view ESG as critical when determining how prepared a company is for the future.

ESG contributes significantly to enhancing a company’s reputation. Because it involves multiple aspects of a business, a strong focus on ESG demonstrates that an organization is true to its vision and mission statements. Many consumers are aware that companies should be socially responsible and aim for positive change.

A strong focus on ESG also reflects positively on a company’s product. This is because any sustainable practice that makes a tangible contribution to society and the environment also has economic value. Consequently, companies that focus on ESG will be able to achieve a positive brand image among consumers, as well as differentiate themselves from their competitors.

A Brief Overview of ESG Benefits

ESG strategies provide a multitude of benefits to companies that invest in them. They can create major business value for the company, and help their international reputation as well.

Environmental – The use of sustainable practices attracts more customers, improves access to resources, and reduces energy and water usage, thus reducing operational costs.

Social – Sustainable practices strengthen community ties while attracting talent, boosting employee morale, and growing social credibility.

Governance – Sustainable practices can lead to government support, subsidies, overcoming increased regulatory pressure, and improved investor relations, e.g., better loan conditions or lower capital costs.

In addition to these benefits, focusing on ESG can also help companies overcome risks such as reputational damage or legal consequences related to labor issues. 

For example, in 2018 the UK’s Court of Appeal ruled that Uber must treat its drivers as workers with rights including holiday pay and sick leave (rather than self-employed contractors). This decision arose after an employment tribunal found Uber’s arguments for classifying its drivers as self-employed "deeply flawed". Because the company did not report on its social responsibilities accurately and transparently, it was found to be in breach of a public sector equality duty.

Integrate ESG into Your Company's DNA

ESG is a lot broader than most people think. Environmental issues like climate change and resource scarcity are just one part of ESG's vast spectrum. In recent years, ESG has come to encompass broader social and governance matters in the public eye. Issues like labor practices, talent management, product safety, and data security are coming under scrutiny as they do not just affect the environment but humans too.

The trend toward ESG becoming mandatory or compulsory is growing. To stay ahead of regulations and competition, as well as to achieve the full benefits of ESG, companies must make this framework an integral part of their DNA. On the other hand, organizations that fail to comply with environmental or social factors could end up having to deal with legal, regulatory, or reputational issues later on.

How Gender Fits into ESG

Investors, shareholders, and potential employees and customers are asking businesses across all industries to include more women on their boards, in C-suite positions, and across the executive ranks.

A groundbreaking study by S&P Global Market Intelligence, When Women Lead, Firms Win, found that companies with female CFOs are more profitable and achieve superior stock price performances than the market as a whole. In addition, the research showed that companies with a high level of gender diversity on their boards were more profitable and had greater growth than companies with lower gender diversity. 

Overall, S&P Global's #ChangePays initiative demonstrates how gender-diverse companies outperform their counterparts on the financial front. The inclusion of gender diversity is playing a greater role in corporate performance and strategy, and companies that have trouble embracing diversity may pose risks to investors. 

The S&P Global research found that women are the most underutilized source of growth that could boost global market valuations.

Summary

ESG (Environmental, Social, and Governance) is a hot topic in the business world, and it’s important to consider this when deciding on your company's direction. As we mentioned before, investors, customers, and potential employees are demanding more of companies with regards to sustainability issues like climate change or equality at work.

A company's commitment to ESG means that they are looking beyond merely making a profit, as they are actively involved in social or environmental causes, and believe in doing business responsibly.

Environmental refers to how your company impacts the environment by its day-to-day operations or through its supply chain. Social includes any effect on society as a whole from your company's products or services: this may include anything from fair labor practices to environmental sustainability programs, such as recycling initiatives. Finally, governance refers to how your company does business and interacts with suppliers and customers in an ethical manner according to laws and regulations within the countries you operate within.

A company with a sustainability and ESG strategy will have a better valuation than one without.

Stay tuned for our next article, where we'll talk about how Xait makes sure we're doing well in terms of ESG.