Why is ESG important? The growing significance of ESG and the role of the board
Why is ESG important? In a world where climate change and social injustice are headline news every day, the increasing significance of ESG — organizations' efforts to tackle environmental, social and governance issues — may seem unsurprising.
But exploring why ESG is crucial — both in terms of the greater good and concerning organizations' reputation and performance — can give companies and their boards valuable insights into how they tackle, monitor, and report on ESG performance.
What is ESG and Why Is It Essential?
To explore why ESG matters, first, let's briefly define ESG. ESG refers to a way of doing business that considers environmental, social and governance elements; a focus on conducting business ethically in all three areas. ESG is often viewed as the more tangible relation of corporate social responsibility (CSR) — easier to quantify, measure, and manage.
That said, ESG still covers a wide range of issues; one of the reasons organizations have historically struggled to get their arms around it and put in place controls, processes and measurement. As all things ESG-related move top-of-mind for boards, investors, customers and employees, getting to grips with managing and monitoring it becomes increasingly paramount.
Why Is ESG Growing in Importance?
As companies across sectors embrace the triple bottom line concept — the philosophy that social and environmental issues should be of equal concern as profits — the profile of ESG has become elevated. All three elements of ESG: environmental, social and governance are seeing increasing scrutiny.
Climate concerns are accelerating a desire for sustainable finance, a concept that's becoming embedded in the corporate consciousness, driving businesses in all sectors to review their practices as well as their investment decisions. Similarly, companies recognize the need to build sustainable supply chains — which tackle environmental and social risks.
Businesses' social concerns include issues like workforce diversity, where performance is increasingly under the spotlight and modern-day slavery. Both in leadership and throughout the organization, the benefits of inclusive and diverse businesses are becoming apparent.
Meanwhile, organizations' governance — how they keep themselves honest on the above and regarding all other areas of operations — is scrutinized to ensure they live up to their promises. Not only are investors becoming more activist on ESG matters, customers, employees and even suppliers are increasingly focused on working with businesses that demonstrate strong ESG credentials.
The Role of Environmental, Social, and Governance Reporting
It's not possible to examine the need of ESG without looking at the rise in ESG reporting — one of the key drivers for companies' focus on environmental, social and governance performance.
ESG disclosures are increasingly becoming expected, while ESG scores and rankings are growing commonplace as a means of assessing a business as a potential investment, supplier or employer. This shift will focus boards' minds on the need for robust ESG metrics and the ability to evidence that they have a proactive ESG strategy.
ESG Becoming the Default Business Strategy
As an approach that values ESG principles becomes the norm, ESG risk becomes analogous with broader business risk, representing a company that isn't taking its obligations seriously. Are you considering your pension investments, supply chain or organization's approach to diversity, equity and inclusion? Your business' stance can be seen as shorthand for your overall approach to risk. This marks you either as a potential partner or an organization to be avoided.
What Role Does the Board Play?
The board can be crucial in facilitating the integration of ESG into the organization's overall business strategy, as we explore in an episode of Diligent's Inside America's Boardrooms podcast. What the board mandates is where the business focuses its attention. And because, as we noted earlier, ESG risk is often conflated with broader business risk, there is good reason for the board and business to focus energies here.
The board plays a crucial role in translating broad ESG aims into concrete strategies, whether environmental, social or governance issues. The board also has ultimate responsibility for corporate performance and reporting, so when it comes to evidencing strong ESG credentials, the buck stops with the board — giving directors a persuasive incentive to prioritize ESG management and measurement.
How Your Organization Can Respond to the ESG Imperative
It's unarguable that ESG is important and growing more so. The board's role is clear; your directors set the tone for the organizational response to your environmental, social and governance challenges.
Setting, measuring and reporting on quantifiable ESG goals is an essential first step — but a hurdle where many organizations stumble. ESG measurement can be challenging, involving unwieldy systems, inconsistent processes and a lack of accurate data to build strategies for improvement.
A siloed approach, lack of collaboration, and gaps in insight make it difficult for executives to oversee ESG performance comprehensively. And without a structured framework and clear objectives, organizations risk ESG regulatory breaches (and the associated non-compliance penalties and reputational risks that accompany them).
Harness the Power of Data Management Software To Support Your ESG Strategy
ESG data management software can doubtless make the difference here, providing businesses with the tools and framework they need for successful ESG measurement and monitoring. But choosing the right solution can itself be a challenge.
Diligent's Buyer's Guide to ESG Data Management Software explores what a market-leading ESG solution should look like and highlights the key areas organizations should be prioritizing as they embark on their search. You can download a copy to discover what questions you should be asking when selecting ESG data management software and the answers you should expect to receive.