ESG stands for Environmental, Social, and Governance. It is a framework that helps stakeholders know how an organization is managing risks and opportunities related to environmental, social, and governance standards. In this context, stakeholders are defined as not simply investors. It also includes employees, customers, and suppliers of a company. These stakeholders increasingly have an interest in the sustainability of an organization’s activities.
An ESG risk score measures a company’s performance based on ESG concerns. It rates its exposure to and experience with ESG-related risks. This score can then be used to evaluate an organization based on these criteria and compare it to other organizations.
ESG is also a means for sustainable investing. It’s a non-financial factor included in an investor’s analysis process. ESG is an investment strategy that seeks to generate long-term competitive financial returns and positive social/environmental impact. Investors who employ this strategy often combine traditional stock analysis with the ESG criteria to make their investment decisions. The idea is that there are three distinct factors that can impact the well-being of a company. These factors are not necessarily captured in the financial records.
Environmental, social, and governance criteria are a set of requirements used by socially conscious investors to evaluate possible investments. ESG is also the term used by companies to define those activities internally and promote them to the outside world.
This is how a corporation behaves as a protector of the environment. Environmental criteria include the energy your company consumes, the waste it emits, the resources it requires, and the effects on living things as a result. It covers a variety of elements that illustrates the effects of a company’s activities on the earth in both positive and negative ways. It is also used to analyze the environmental risks of a company and how the company is managing the risks.
Examples of issues that are considered under environmental criteria in ESG strategy include waste and pollution, resource depletion, greenhouse gas emission, and deforestation.
This is how the company supports relationships with its labor force, suppliers, customers, and the communities in which it operates. In effect, they examine what impact it has on people at each stage of its operation. Social criteria focus on the relationships the company has and the reputation it nurtures with people and organizations in the communities where they do business. It examines the company’s relationships with other businesses and communities, as well as how the companies treat their employees.
Examples of social issues in the ESG strategy include working conditions, employee relations & diversity, health and safety, and stances on public issues
This is concerned with the leadership of a corporation, executive compensation, audits, internal controls, and shareholder rights. Governance is the internal system of practices, controls, and procedures a company adopts to manage itself, make good decisions, conform with the law, and satisfy the requirements of external stakeholders. It covers everything related to how corporate managements and boards relate to different stakeholders and how companies are run. It refers to a set of rules, systems, structures, and policies governing a corporation.
Examples of governance issues include the diversity of the board of directors & management, corporate risk management, corruption & bribery, etc.
How are ESG guidelines and standards determined?
Over time, an ESG ecosystem for ESG reporting and integration has been developed by a wide variety of organizations. These organizations develop guidelines and set standards for companies that report sustainability information. Some of them also rate and rank companies according to these guidelines and standards. The World Economic Forum has produced an ESG Ecosystem Map to better illustrate this.
What is an ESG Strategy?
ESG Strategy Definition:
An ESG Strategy illustrates how a company operates regarding environmental issues and social responsibility. Investors often think about a company’s ESG strategy to assess investment risk. ESG factors and scores are used as investment screening tools. Developing an ESG strategy helps the company brand, by demonstrating a socially conscious business approach and values to consumers, employees, and suppliers.
Producing a solid ESG strategy will help stakeholders to understand that your company is dedicated to a more sustainable future. A company’s ESG performance is examined by employees, prospective investors, journalists, partners, and the general public. The processes, data, and significance assigned to certain aspects might range from one institution to another, resulting in sizable variations in ESG ratings and results.
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How do you develop an ESG strategy?
When developing an ESG strategy, it’s vital to ensure that it is adapted specifically to your company and its industry. It can’t be developed apart from your corporate objectives or without considering the commercial environment.
Your priorities need to be in line with your business strategy, your sector’s overall trends, and the priorities of your stakeholders. Your ESG strategy also needs to take into consideration external factors. This could include the introduction of new regulations or laws. Another example would be pressure on your industry from investors or the news media.
The first step is to determine which new ESG-related regulations and reporting standards may be relevant to your company. Stay current with regulatory compliance by consulting the following frameworks:
- United Nations Sustainable Development Goals (SDG) – This is a collection of 17 intered global goals designed to be a “blueprint to achieve a better and more sustainable future for all”.
- Sustainability Accounting Standards Board (SASB) – These standards highlight ESG issues that are applicable to 77 industries.
United Natihttps://www.unglobalcompact.org/library/ons Guiding Principles on Business and Human Rights – This is a framework regarding the issue of human rights and transnational corporations.
- Looking at what others are doing is another good place to start. Different sectors are at different stages of their ESG journeys and will have varying priorities. Study their approaches, and you will take away some actionable tips for your own business.
Engage with Stakeholders
- Stakeholders today include not just shareholders or investors but also employees and consumers. Determine the stakeholder opinion around your strategy. Establish what they value and where their priorities lie. Identifying stakeholder ESG priorities is an excellent way to determine your own.
- Developing and improving your ESG strategy should be guided by the stakeholders that your company affects.
- Decide which stakeholders to prioritize by assessing each group’s influence on the organization from the outside in.
Build a roadmap and framework
- Build a framework that states your company’s aspirations, objectives, and milestones. A strong ESG framework provides stakeholders with a thorough view of your company’s strengths and goals.
- Get buy-in from stakeholders, employees, the public, and investors by building a clear roadmap for implementation. Explain targets, milestones, and rationale. This requires a team represented throughout your organization.
How do you explain that an ESG strategy makes financial sense?
It facilitates top-line growth
A robust ESG plan helps companies to access new markets and grow into existing ones. When government agencies trust corporate actors, they are more apt to grant them the approvals and licenses that offer new opportunities for growth. It can also drive consumer preferences.
It reduces costs
It can effectively reduce rising operating expenses. There is a correlation between resource efficiency and financial performance.
It minimizes regulatory and legal interventions
This allows companies to attain more strategic freedom which reduces regulatory demands. Usually, one-third of corporate profits are at risk from state intervention. (Regulation’s impact varies by industry.)
It increases employee productivity
A strong ESG plan can help companies attract and keep quality employees, boost employee motivation by inspiring a sense of purpose, and increase productivity overall. Positive social impact correlates with higher job satisfaction.
It enhances investment and capital expenditures
A strong ESG plan can increase investment returns by allocating capital to more promising and more sustainable opportunities. The investments required to modernize your operations may be sizable. Choosing to wait it out can be the most expensive option of all.
ESG factors can create value for a company. It’s important to understand what that value is when promoting your ESG strategy. Different companies within the same industry will not have the same ESG strategy. This will depend on their individual positions and where they are at in the corporate life cycle. Value creation should be the core message. It’s important to analyze what matters along your value chain, where the greatest potential lies, and which areas have the most impact on your company.
A corporation’s ESG priorities will evolve over time. This is due to an increased understanding of their effect on the environment and their communities. In some cases, this will be motivated by external obligations like new legislation or reporting requirements. In others, it will signify the ever-changing interests of stakeholders.
Corporate strategies are not static. This is particularly true with ESG strategies. You’ll need to constantly measure, evaluate, and refine your corporate ESG strategy so that it remains relevant.
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About the Author
Cory Peterson is Director of Sales & Marketing at LED Lighting Supply where he focuses on improving customer experience and revenue operations. Cory writes about commercial & industrial lighting, along with topics important to contractors and facility managers. In his free time, Cory enjoys traveling, snorkeling, exercise and cooking.