ESG 101: Understanding the Basics

Summary: The What and Why of ESG......Its just under 1000 words. I'm sure you can get through it quickly!

In today's complex landscape, understanding why environmental, social, and governance (ESG) matters is essential to drive growth and success for all organizations. Businesses no longer operate under a cover of darkness as they did long ago where most consumers had no interaction with them other than making a purchase. Today, roughly 58% of the US population now invests in the stock market so many people are looking at a company's financials and annual reports with more detail. Its easier than ever to find and understand a company's financial information with all the easily accessible resources online. Also, many people, globally, are paying attention the environmental impacts of products and services and are very willing to share their thoughts online - both positive and negative. Lastly, any corporate governance issues quickly become headlines. Many people are unhappy with and concerned about ballooning executive compensation, lack of gender diversity on boards and human rights violations, amongst others. All these topics are now out in the open for everyone to see, comment on and share.

In this "new environment" as companies seek to innovate, it's become evident that "traditional" profit-centric pursuits alone can't make companies successful, let alone address pressing global challenges. In fact, some of these challenges directly result from traditional business practices. Over time many leaders have begun to realize that there must be a better way where the business can be both financially successful and still address the needs of all stakeholder, not just shareholders. This is why focusing on ESG in has become essential to remain competitive.

Sadly some business leaders still don't believe that corporate ESG considerations are their concern. They feel making these changes may hinder profitability or are only done for compliance. Yet, it's crucial to recognize that ESG is powerful tool for unlocking growth opportunities, reducing costs, and strengthening your brand in a world where ESG is steadily becoming synonymous with responsible and forward-thinking corporate practice.

The History of ESG

ESG is an approach to businesses that goes beyond the sole focus of shareholder return. Instead, a focus on ESG takes into consideration the ecosystem, both internal and external, that the business operates in and how they affect each other. Additionally, interest in ESG investments has been steadily rising over time. The amount of capital allocated to ESG funds has grown substantially year to year is estimated to reach 41 trillion USD by the end of 2022.

Here is an overview of the three different components of ESG

Environment

Environment focuses on a company’s use of natural resources and the impact of their operations on the environment, both directly and across their supply chains. This includes topics like:

• Greenhouse gases (GHGs)

• Air pollution

• Energy consumption

• Water consumption

• Waste output

• Nature usage

• Environmental policies

Social

Social focuses on how businesses treat their human stakeholders, both inside and outside the corporation. How are relationships managed within the workforce and across the societies in which it operates? This includes topics like:

• Comparative Living Wages

• Diversity and Inclusion Percentage

• Gender Pay Gap

• Employee Engagement

• Company Culture

• Re-skilling/Training

• Health and Safety

• Human Rights

• Social Responsibility

Governance

Governance focuses on how a corporation operates at the highest-levels of decision making, political involvement, and ethics. This includes topics such as:

• Executive’s Pay Ratio

• Quality of Governing Body

• Makeup of the Board

• Ethics and Anti-corruption Policy

• Shareholder rights

• Management structure

• Company policies and values

Why ESG matters

ESG wasn’t invented to simply be an inconvenience to executives, to force them to report on everything they do - with (sadly) still no reporting standards. Instead, this approach evolved to address some of the major challenges we face today, that if continue unaddressed, can lead to fatal consequences for everyone. But while addressing these specific challenges, leaders found benefits across many areas. When you shine the light on something, it becomes easier to see flaws and becomes an opportunity for improvement as opposed to a flaw to keep hidden. If you make your products more sustainable, your customer will base grow as many Millenials and Z make product choices based on environmental impact. Additionally, with competition for highly sought-after talent increasing, a commitment to ESG can work to your advantage. Corporate ESG raises the consciousness of your organization as you start considering things other than growth or profit. This translates into a more people-oriented culture which increases happiness and engagement. 88% of Millennials indicate they want to work for a company that reflects their values.

At the environmental level, we must contend with a planet that is getting hotter by the day. Small increases in temperature mean a melting of the polar ice caps and increased natural disasters, such as storms and floods which is impacting all of us. Business activities in the forms of deforestation and industrial pollution means the destruction of ecosystems, extinction of species, and a less beautiful environment and is driving a significant amount of the climate crisis.

At the social level, wealth, racial, and gender disparities create a less fair society. Income inequality leads to crime and civil unrest which makes our societies unsafe for everybody.

At the governance level, corporate lobbying and bailouts create less faith in institutions and the social contract. Persecuted whistle-blowers and out-of-control executive compensation contribute to an environment where the business and political elite appear untouchable.

If these factors remain unaddressed and no ESG commitments are made, the system we rely on to engage in business will eventually collapse – and more importantly, we may not even have a planet to live on.

All in all, creating and executing the right ESG strategy can serve to future-proof your business. In addition to risk management, companies that prioritize ESG initiatives can position their brand as market leaders and trendsetters among the public, partners, government, and investors.