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What is ESG?

22 February 2023 | 6 Min Read

ESG, or Environmental, Social Responsibility and Governance, is the hottest topic for businesses. Investors, financial institutions, customers and other stakeholders use ESG data to assess a company's impact on the environment, workers and communities.
A high ESG score can benefit companies by encouraging them to attract and retain customers, reduce waste, and minimize the likelihood of lawsuits or regulatory and social scrutiny. Sticking to it could be a real reputation management tool for the long term.

ESG (Environmental, Social and Governance) is a 21st-century framework that requires businesses to consider the long-term consequences of their decisions. Additionally, it emphasizes the ethical standards that guide operations, as well as relationships with stakeholders (have a look at B-Corp status for a deeper dive). It's being increasingly acknowledged due to pressure from employees, investors, and consumers that want to make a positive impact in the world.

Consumers, becoming more conscious about the products they purchase, increasingly prefer those that reflect their values and protect the planet. Companies should use less packaging, recycle more and produce products traceable back to their source.
Companies can benefit from ESG scores as a valuable tool to demonstrate their business practices are ethical and sustainable. Furthermore, it could also improve the overall profitability of an enterprise as it reduces energy costs and other expenses associated with sustainable practices. However, it’s not just about profit for more companies looking to improve their softer metrics and values. 

Additionally, having a strong ESG score can attract and retain top talent, as many workers prefer companies with an emphasis on environmental responsibility and society. 

Investors, who are often the first to observe a business' financial performance, are increasingly looking at ESG scores to ensure they're investing in an established and trustworthy business that will prosper in the future. It can help avoid companies with histories of major or recent controversies over human rights, animal welfare, environmental concerns, governance problems or product safety hazards.

A high ESG score can be an effective tool to attract and retain top talent, as it instills a sense of pride among staff members. Furthermore, having an effective ESG agenda may appeal to younger generations of staff who are more aware of the environment and society.

While ESG may be a new concept to many businesses, many already have policies in place that address the three primary areas. Furthermore, companies often have an internal team responsible for monitoring and reporting these policies.

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    What does ESG mean to businesses and consumers?

    ESG has become an increasingly important topic for investors, business owners and consumers. This is because ESG allows them to identify companies with high ethical standards who are making wise decisions for the planet's future. Strong ESG policies can assist small to mid-sized businesses in securing funding, improving their reputation and reducing risk profile. It also gives them a competitive edge when expanding into new markets or entering existing ones.

    Ecological sustainability has always been an integral component of business operations, but its significance has grown even more significant in light of the climate crisis and other global threats. This has compelled consumers and companies to search for ways to reduce their environmental impact while still meeting financial objectives. 

    Due to this, there has been an uptick in demand for sustainable products and brands (enter Sustainabuyer!). This is due to consumers wanting more informed choices, and a willingness to pay more for goods that have been responsibly made.
    Furthermore, employees are becoming increasingly concerned with their employer's commitment to the environment and society, as well as their own rights. If they believe their employer is making a meaningful impact on society, employees will continue to put in extra effort and longer hours if they believe it is doing its part to be responsible.

    That means small to mid-sized companies who take these issues seriously are better able to attract and retain top talent. That is why so many are now investing in developing and improving their ESG programs to meet the demands of today's workforce.
    Businesses are also incorporating ESG by seeking partners with strong sustainability practices, particularly for supply chain partners. Sustainability is truly a top to tail thing! 

    These suppliers can have a significant impact on the quality of a company's product or service, and they also have an obligation to use renewable energy, safeguard workers, and support local communities. As such, they become desirable partners for businesses with ESG policies in place.

    In conclusion, ESG continues to be an increasingly pressing concern for business leaders as the world's population grows. Therefore, it's essential that businesses comprehend what ESG is and its significance to businesses and customers.

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    How can companies improve their score?

    To begin, businesses need to identify which ESG metrics are most pertinent. Could this be carbon emissions, human rights, waste management, product safety and health, supply chain practices, labor standards or something else?

    Second, creating a workflow for collecting and reporting ESG data points. Doing so will help avoid error-prone manual or spreadsheet-based methods of ESG reporting and data management. Furthermore, collaboration with others, seeking opportunities to improve, and informing stakeholders on best practices will become much smoother. Remember, clean data can lead to cleaner results. 

    Once top ESG metrics are identified, it's time to put them into action!

    Companies can then work to raise their ESG score by taking steps that are beneficial to both external and internal stakeholders. These may include increasing employee engagement, cutting energy consumption, or improving environmental practices.
    Another way to boost an ESG score is by implementing sustainable business practices within an organization. This could include encouraging a healthy workplace, offering flexible work hours and pay structures, as well as making sure facilities are eco-friendly.
    Additionally, it's essential that employees receive comprehensive training and comprehend the significance of a responsible business model. With proper training, they will be empowered to accept accountability for their impactful actions and can make informed decisions accordingly.

    Finally, there can be a decision as to whether to invest in an internal ESG rating system. This could be beneficial for companies that lack control over external ratings and desire to build trust through transparent standards that are easy to comprehend.
    However, you must ensure your ESG rating system is reliable and trustworthy. 

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    What companies have high ESG scores?

    Companies with high scores tend to be seen as more sustainable. Furthermore, they tend to have successful stakeholder relationships and a favorable brand reputation.
    Companies can get an ESG rating through various sources, such as MSCI or Sustainalytics. These rating providers typically assess the three components of ESG and then aggregate them to assign a score.
    Furthermore, a company's overall score can reflect its performance on various issues like employee relations and the human rights record of its workers. It also indicates whether an organization takes ethical actions to enhance its business operations and treats customers fairly.

    A company with a low score might be harming the environment or its employees' health and safety. They could have an unfavorable record when it comes to climate change mitigation efforts or they may face lawsuits over employee or environmental violations.

    Large investors and activist investors typically invest in companies with strong ESG ratings, as they are willing to sacrifice some financial performance for an ethical and sustainable company. However, stockholders and small shareholders tend to feel less compelled by these ratings according to research from Dimson, Marsh, and Staunton (2020).

    Some investors, such as asset managers and pension funds, use ESG ratings when making investment decisions. These firms usually compare a company's ESG rating with the industry average and other elements to assess its risk/opportunity exposure.

    So next time you look into a company, have a look around for their ESG score and credentials. You never know what you might find! 

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