ESG initiatives may be dominating headlines, but there is still the assumption for many that it is only relevant to larger businesses or those looking for a new marketing initiative. The truth is that there are real benefits to businesses bringing ESG into the heart of all business practices.
To do so you must first overcome ESG's apparent impenetrability: this is a complex (and often confusing) area and one which tends to assume an incredibly broad knowledge of the law as well as de facto requirements of industry bodies and sustainability-conscious stakeholders.
What is ESG?
A good place to start is by understanding what we mean when we talk about "ESG". ESG is an acronym for "environmental, social and governance" factors.
Environmental: your relationship with the environment, such as climate change, energy efficiency and waste. Do you understand your direct and indirect environmental and carbon footprint – and have you set targets and established a plan to mitigate these?
Social: your relationship with society, critically: how do you look after your workforce, customers and safeguard human rights in your supply chains. Are you attracting and promoting a diverse range of individuals into your business, reflecting the people that you deal with?
Governance: what is your purpose – is your focus just on shareholder returns, or does it encompass a wider role in society? How have you embedded your purpose at the heart of your business, and established corporate governance measures to deliver this, such as board independence and capped executive compensation? Does your business apply in all its processes the principles of fairness, accountability, responsibility and transparency?
Why is this relevant to you?
There is growing evidence that businesses that implement ESG policies perform better than their peers, giving long-term competitive advantage through enhanced employee morale, customer loyalty and brand value.
Stakeholders – including institutional investors - are moving towards a position where they will expect to see organisations with whom they deal implementing ESG policies. Already we have seen insurers and funders pulling away from supporting businesses that don't prioritise ESG policies and our discussions with a number of institutions reveal that they will soon start to expand this approach to businesses across the board. By implementing ESG policies in a meaningful way, you should become more robust as well as more attractive to your suppliers and customers.
Where to begin?
It is for a company's directors to decide whether to engage with ESG, or not. Directors are best placed to judge the business's impacts and dependencies on environmental and social factors – and are responsible for its governance.
The generally accepted view of the purpose of business has changed to reflect the critical role the private sector has to play in society. Businesses that apply ESG principles and embrace a wider purpose, articulating, living and demonstrating a positive contribution to people and planet – as well as profit – strengthen their social contract with stakeholders, build value and encourage sustainable growth in the long term.
Boards that take the time to understand these issues, and pivot their corporate purpose – amending their corporate governance and operations with real integrity – find that they are well positioned strategically to meet the increasing tide of legal and regulatory obligations around meeting social and environmental externalities.
For others, seeing the opportunities in an environment of ever greater disclosure and accountability will prove an increasing hurdle to success.
What will be key for all businesses moving forward is to find a balance between ESG and profitability, embracing inevitable change without diminishing your bottom line.