ESG – What is it and Why Does it Matter?

The landscape of business has been changing rapidly over the past few years with many factors effecting the way that decisions are made, and where money is spent. Lockdowns, social justice reforms, a greater focus on pay equity, and climate crisis have changed the way that everyone works, lives, and thinks about business. One acronym has been gaining importance in decision making in all organizations, ESG.

What is ESG?

ESG stands for Environmental, Social, and Governance and is put forth as a new standard of how to judge how responsible and sustainable an investment or business is regarding how it treats its employees, customers, and the environment. While this term has been around for a little while, many are still confused about what it is and how it affects them.

First let’s break down the separate components of ESG,

The Environmental aspect of ESG is largely focused on reducing carbon emissions, increasing energy efficiency, and shifting to more environmentally friendly and renewable energy sources with the goal of the United States being net-carbon zero by 2050. The US government has been focusing on updating infrastructure and encouraging the development of wind, solar, and hydroelectric energy sources to reduce the countries carbon footprint and dependence on fossil fuels. They are also putting pressure on businesses through legislation to find ways to be less dependent on fossil fuels and more environmentally friendly.

Introducing new and/or the refining of existing internal business policies help to improve customer service, employee happiness, and ethical business practices. These initiatives as well as community outreach are a large focus in the Social area of ESG. By improving on these areas, an organization can further increase the level of customer satisfaction, reduce risk of disruption of business from high employee turnover or supply chain issues, and the encourage a higher level of employee volunteerism in their local areas which reflects positively on a business’ standing in the communities it employs and serves.

Regarding the Governance piece of the ESG puzzle, the enforcement and refinement of existing fair hiring practices, new social reforms, concentration on pay equity, and the establishment and refining of DEI processes have been the focus. Making sure that the leadership of an organization is diverse and inclusive has been a large focus of governance to date. Reviewing and standardizing business practices also plays a large role by ensuring that every person in the organization is treated the same way and conducts business in a professional manner with its customers and business partners.

ESG Ratings

Over the last decade independent companies have been established and focus solely on trying to standardize the ESG ratings. Well known ratings companies like FTSE, Morningstar, and S&P have created division specifically for creating ESG ratings for investments and organizations in recent years, however, the metrics, methodologies, and ratings systems are still in flux and a full standardized system has not been established at this point.

While ESG rating is still in its early stages, independent companies have been established and focus solely on trying to standardize the ESG rating of organizations. However, this doesn’t mean that your organization can afford to wait until the ratings system for ESG matures.

ESG scores will start to affect every part of your business sooner than you may anticipate. A bad ESG score can cause you to lose business from consumers, affect your ability to secure loans or government subsidies, and can make you less competitive overall with organizations that have done the work to secure a better score.

Conclusion

ESG is still in its infancy, but it is quickly becoming an institutional standard for evaluating investments and business organizations so needless to say it isn’t going away any time soon. Many organizations are in the first phase of their ESG plans with most focusing on internal processes to meet the Social and Governance specifications, however, it is never too early to investigate your options for increasing your assets energy efficiency and reducing your Environmental impact.

 

 

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