Environmental, social and corporate governance (ESG) has risen up the agenda for modern businesses despite sometimes being misunderstood and occasionally controversial. Some believe it is the job of government not business to deal with environmental or social issues. Others are concerned that ESG is too closely associated with political agendas.
However, ignoring ESG is not an option that businesses can afford any longer due to the legal and reputational risks involved. Here we look at ESG and assess some of the factors that businesses must consider.
A few years ago, it would have been rare for many businesses to consider ESG factors and wider sustainability issues in significant detail.
Now a combination of government policy, increased regulations, industry initiatives and increased awareness of climate change have changed that. This change brings a number of challenges.
There have been concerns around availability and quality of data, effective modelling of outcomes and impacts.
There are also risks around greenwashing and the potential for green hushing – where firms keep quiet about their emissions reduction targets to avoid scrutiny.
Other businesses may consider that addressing the climate and biodiversity crisis is a matter for government and policymakers, not for businesses.
These are legitimate concerns, but they should not be a barrier to firms meeting their legal duties. Especially as the pace of change in relation to data improvements, policy development and guidance has reduced some of these industry challenges in recent years.
Many business leaders believe considering ESG factors helps them to make better decisions for their firm.
This was the conclusion of an Institute of Directors (IoD) survey. In addition, the 42% of business leaders polled by the IoD said that all three aspects of ESG were of equal importance. Of those remaining, 26% highlighted 'governance' as the most important component, whilst 17% chose 'environment' as the most important factor and 9% selected 'social'.
The IoD survey also highlighted that a solid governance framework is a pre-requisite for success in the other aspects of ESG. So, getting governance right should be the starting point for the directors of all kinds of organisations.
Rules and oversight
ESG governance refers to the implementation of decision-making, board oversight, rules, policies, and procedures throughout an organisation relating to environment social and governance.
Key governance topics include:
- board diversity
- business ethics and conduct
- tax transparency and strategy
- risk management
- anti-competitive practices
- data protection, privacy, and cybersecurity
- ESG data controls
- ESG reporting and disclosure.
Environmental relates to how firms perform as a steward of nature, and how they utilise natural resources in the course of doing business. It also takes into consideration environmental concerns and is often the most watched element by members of the public.
Common environmental factors include:
- carbon emissions and energy usage
- water usage and management
- waste management and reduction
- biodiversity and habitat conservation
- pollution and toxic chemical usage
- supply chain sustainability
- climate change adaption and resilience.
The final part of ESG is a broad topic that covers a wide range of social issues. It covers the business's relationships with everyone from the shareholders and employees to tenants, neighbours and partners. How a business interacts with these stakeholders is very important to potential investors, and managing these social relationships should be at the heart of any ESG strategy.
Common social factors include:
- diversity and inclusion
- fair pay
- flexible working hours
- employee turnover
- company relationships
- company hierarchies
- tenant relationships
- company ethics
It is vital that businesses of all types improve their understanding of climate, ESG and wider sustainability issues. They will also need to improve the quality of their policies and disclosure, move away from boilerplate wording and ensure action follows intent.
In the past not enough firms focused on ESG issues in any significant detail, now they can no longer ignore the elephant in the room.
Implementing ESG successfully means changing budget priorities but can also open up new opportunities for your business. Please contact us if you want to discuss any of the financial aspects related to this area.