Businesses are increasingly recognizing that environmental, social and governance (ESG) strategies aren’t just nice-to-haves. Running a business sustainably, fairly and ethically makes sound commercial sense too. Here, we explore why ESG is good for business.
Why Is ESG Important to Business?
ESG is under a microscope as never before. Pressure from increasingly activist shareholders and consumers is causing businesses to assess their practices, their investments and their suppliers.
The COP26 summit brought environmental issues to the fore. Organizations across sectors are striving to reduce their greenhouse gas emissions and take other steps to become “nature positive.” At the same time, a collective social conscience is driving individuals and businesses to look more deeply into issues like pay equity and other diversity and inclusion challenges.
This elevation of ESG in the public consciousness leads more and more businesses to embrace the triple bottom line philosophy, which posits that social and environmental issues should be as important as financial performance. And as these issues take on growing significance, reporting and regulatory mandates grow too.
All very compelling — but ESG isn’t just an imperative; it can actively be a positive for organizations.
How Does ESG Create Value for Businesses?
Businesses are realizing that concepts like the triple bottom line are not important only for their own sake but (largely because of their growing prominence) are also driving value.
What are the benefits of ESG? Here are just a few examples of the way ESG is creating value for businesses:
- Proven commitment to ESG issues makes a business an attractive investment. 2013 saw less than $2 trillion invested sustainably, but by 2019 this had rocketed to more than $31 trillion. By the end of that year, one in three dollars under professional management in the US was reported to be managed in accordance with sustainability metrics.
- Organizations increasingly recognize that more diverse thinking = better decisions. Both in leadership and throughout the organization, corporate strategy and performance benefit from an inclusive and diverse business.
- You may be looking to take your business to the next stage by raising finance. If you’re considering an IPO, getting your governance in order is a pre-requisite.
- Investors and buyers rely ever more heavily on ESG scores and ratings to signpost wise choices...
- …and other forms of ESG reporting are fast becoming the norm. In some areas, reporting has been required for many years — such as with the annual EEO-1 report that US employers need to complete, detailing demographic workforce data. Now, similar reporting on environmental and governance practices is increasingly common.
- Talent attraction and retention is easier if you’re an organization with a strong ESG track record.
- Regulatory imperatives around ESG are growing; comply with requirements like the Sustainable Finance Disclosure Regulation, and you avoid the financial, reputational and other non-compliance penalties that can directly or indirectly impact your bottom line.
- Good ESG performance makes borrowing easier and cheaper. The lower risk presented by an organization that’s strong in ESG means that a better ESG score translates to about a 10 percent lower cost of capital.
Why Poor ESG Performance Is Bad for Business
There are clearly numerous reasons why ESG is good for business.
There is equally — if not more — compelling evidence that poor ESG performance is bad for your business.
Failing to comply with ESG policies and best practices comes with a risk that you will “lower long-term value by increasing the chances of new ESG incidents, reputational damage, and less social capital and trust.”
A Harvard Business Review survey in 2019 found that ESG issues were “almost universally top of mind” for the investment and asset management community. Organizations that turn a blind eye to this community’s priorities will make themselves less attractive investments.
Businesses struggling to attract and hold onto the talent they need in the face of the great resignation will find themselves blacklisted by potential employees for poor ESG performance.
And if those weren’t compelling enough, companies with poor environmental and social scores are more likely to go bankrupt, while those who have faced problems relating to ESG issues tend to see their stock prices suffer for a year or more.
If ESG Is Good for Business, What Should You Be Doing?
It’s pretty unarguable that ESG is good for business. And that failing to address the environmental, social and governance challenges you face will disadvantage you compared to your more ESG-focused competitors.
Setting ESG strategy isn’t enough here; as an organization, you need clear action plans to ensure you achieve your ESG goals. And greenwashing is all too obvious: paying lip service to sustainability and social ambitions will do your organization more harm than good. You must devote resource, attention and commitment to ESG if you want to see it deliver value.
This means putting in place clear objectives and processes for monitoring progress. A modern ESG approach demands that data is on-point, comprehensive and easily interrogated, so you base your ESG strategies, tactics and reporting on robust metrics.
You need oversight of your ESG risks, and clear direction to tackle them if you are to reap the rewards of an integrated ESG strategy, and fully appreciate why ESG is good for business.
Find out more about how Diligent’s ESG Solutions can help you to measure and achieve your ESG goals.