Three little letters are popping up more and more in corporate discourse: ESG. Largely overlooked until the mid-2010s, ESG data is now driving major decisions for investors. And, no matter if you’re a public company or a private enterprise, ESG is also governing leadership across industries, as well.
ESG, which stands for “environmental, social and governance,” represents a set of non-financial factors that investors weigh when evaluating a product or company to determine its long-term sustainability as an investment. With each of these factors becoming increasingly political and personally impactful to average citizens’ day-to-day lives, it’s perhaps not surprising that they’re gaining significance in the investment world. While prioritizing these variables has always been important for establishing company integrity, the stakes are growing higher.
Here’s what you need to know to improve your company’s ESG score and why leadership needs to focus on ESG initiatives.
How ESG benefits the Triple Bottom Line
As sustainable investing grows as a thematic strategy, the stakes for corporations to become more mindful of their ESG impact is higher than ever. The US SIF Foundation’s 2020 trends report showed that assets managed by ESG principles increased 42 percent from 2018, growing to $17.1 trillion by the start of 2020—and these numbers are only growing. What factors fall into each of these three categories to determine a company’s overall ESG score? Here are some examples of each:
- Environmental: What impact does a company have on the environment? This takes into consideration its carbon emissions and pollution rate, contribution to deforestation, green energy emissions, waste management and efficiency of water usage.
- Social: How does a company improve society for those both inside the organization and outside of it? This category includes factors like diversity among employees, data security, customer satisfaction, the company’s policies and practices around handling sexual harassment issues and fair labor practices.
- Governance: How does a company’s management team increase (or hinder) positive change? This includes criteria like diversity among board members, political contributions, executive pay rates, lobbying activity, lawsuits and internal corruption.
Growing the company’s focus on ESG
The benefits of boosting ESG score extend well beyond just gaining attention from investors and improving the bottom line. Executives who embrace ESG initiatives will find themselves at the helm of a company that’s better-poised to succeed across shifting environmental, social and political landscapes. Key benefits include:
- Creating a culture of sustainability: With the state of the climate, people—especially those in the younger generations—are eager to phase out unsustainable products, practices and corporations in favor of those that align themselves with the planet’s best interest.
- Attracting prospective employees: ESG can signal to prospective employees that you’re a company they’d be proud to work for, as well as one that would value their wellbeing health, and work. This is an incredible incentive for many top candidates, especially if you’re in the market for a retained executive.
- Retaining employees: People want to feel impactful and valued in their work. Knowing you work for a company with strong morals and values—and one that values wellbeing and health through their policies and practices—is a powerful retention tool.
- Profit and partnership: With ESG data increasingly driving business decisions, prospective business partnerships, investors and sales will all increase as ESG score does.
While so many business decisions are challenging, ESG is one that requires little thought to pursue. It adds value to the business both ethically and financially, and it’s not a trend that’ll be going away anytime soon.
Where does ESG intersect with your company?
When considering ESG, it’s vital for executives to consider where within the business they can take on ESG work. Prioritize those projects, then develop each of them into actionable steps you can undertake as an organization. Depending on the size and scale of the company, and the industry as a whole, different examples may immediately jump out. Use these as footholds for introducing ESG concepts to mid-level management and encourage this type of thinking from a top-down perspective.
Evaluating the scores of industry peers is another great way to identify potential areas of improvement, or those rife for transformative change. This is also a great way to close gaps between your organization and competitors when potential investors, partners and buyers face choices about who they want to work with. Remember the Triple Bottom Line.
No matter where you choose to begin, setting out to improve your company and the world by improving your ESG rating is both fulfilling and profitable.