Among corporate buzzwords, there are not many that are as maligned or misunderstood as ESG. Mention ESG and you are likely to get some fairly strong reactions. And, although we are sustainability professionals, we totally get it. After all, you have enough on your plate already – there’s no time for some fuzzy do-good-by-the-world concept that could cost a lot of money. If this is you then we urge you to keep reading and see for yourself that ESG is neither an ill-defined abstraction nor a money-losing proposition. In fact, if done right it can bring several material benefits to your organization.
What is ESG?
ESG is short for “Environmental, Social and Governance”. Some of us may be familiar with ESG’s precursor, CSR – Corporate Social Responsibility – which was a self-regulated model embraced mostly by bigger corporations. CSR was a way for businesses to show that they were not just motivated by profit but that they were also socially responsible towards people and the planet.
While the goals of CSR were lofty, the result was anything but. Some of the lingering skepticism from botched CSR attempts seems to have carried through to ESG even though these two are quite different in substance, if not in spirit.
For one, ESG is much better defined and externally driven – by investors, regulators and legislators – than CSR. Climate change has been the major driver of ESG but, in addition to greenhouse gas emissions, other problems associated with modern businesses have also figured prominently in its definition. These include rampant waste created by businesses and products, unethical procurement practices, lack of diversity and inclusion, and income inequality.
Although the intent of ESG is for businesses to act upon all such issues, many of them have focused on the aspects that have been most problematic for them. For example, oil & gas companies have had to do a lot of restructuring in order to reduce their environmental footprints. For clothing and shoe brands, the main emphasis has been on improving working conditions in factories. For big tech companies, data privacy as well as diversity and inclusion have been among the major problem areas.
Should You Do ESG?
While most organizations agree that they need to make changes to address ESG, only some have taken that initiative up till now. These generally tend to be bigger entities that have the wherewithal to execute it systematically and in depth. However, in doing so they are also required to include their entire value chain and supply partners. You could very well be part of that ecosystem and, in fact, you may have already received RFPs from somewhere along the supply chain. Hence, it behooves all associated businesses, such as yours, to adopt ESG as early as possible or else risk losing out to competitors that are better prepared.
If yours is a publicly traded company then you are very likely facing investor pressure to adopt ESG. Sustainability themed funds are on the rise globally with about a quarter of the managed assets in the US already comprising of ESG-rated investments. There are several rating agencies that provide sustainability related information for asset managers to use in their portfolio determination. Some of these agencies collect information directly from companies that have an ESG program in place. Others specialize in gleaning publicly available data, such as finance reports, news articles, even social media accounts, to build a speculative ESG profile of a publicly traded company. Hence, it’s in the best interest of such a business to instead adopt ESG measures, then apply for a more accurate and even favorable rating.
If you are in the enviable position to bypass investor pressure, it is still going to be virtually impossible to ignore the regulatory requirements. Several ESG policies and regulations are either already in place or are in the works across the world. While the current landscape of such legislation appears fragmented, there is already a shift towards consolidating the rulings under the ESG umbrella by following the framework proposed by the Task Force on Climate-Related Financial Disclosures (TCFD).
The United Nations Sustainable Development Group (UNSDG) goals is another ESG framework widely adopted by organizations across the world. Both TCFD and UNSDG have specific guidelines that have proven to be very useful to businesses looking to implement structured ESG programs.
Benefits of ESG
Recent disruptive events, like the Covid-19 pandemic and the Russia-Ukraine war, have revealed vulnerabilities in the global supply chain. While many businesses have floundered, those with ESG plans have generally fared better than others. This is not surprising because a methodical approach to ESG involves analyzing risks and inefficiencies. It also entails acting upon that knowledge to set up appropriate guardrails (“resiliency”) and cut down on wasteful operations (“mitigation”). Sure, this requires an upfront cost, however, it also paves the way for avoided costs in the future and provides a tremendous value-creation opportunity.
There are several additional benefits to adopting sustainable practices. It could potentially qualify your firm for a lower cost of capital from the ESG conscious finance industry. It can help you attract highly qualified employees that are increasingly looking for meaningful work. And, perhaps most importantly, you can gain the loyalty of your clients and customers because they will appreciate your sincere efforts towards making the world a better place.
We hope that you will give ESG a good hard look and, if you choose to adopt it, Your Carbon Steps can help you get started with a customized, well thought out and actionable plan.
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