Traditionally, the main concern of many investors had been the level of the returns that investment provides, with ambivalence towards the way those returns are generated. Now the whole industry is seeing a drive towards a great responsibility when it comes to stewardship of investors with cash, with many investors looking for ways to invest their savings.
Responsible or ethical investing is not new, with most asset managers providing investments or funds under different guises. For that reason, standards are set in the business industry to determine how companies run with respect to the individuals they work with, the world around them, and whether or not they work responsibly. These, in other words, are termed environmental, social, and governance (ESG).
What ESG Investing Is and What It Means
ESG refers to a set of standards for business behavior used by socially conscious investors to screen all possible investments. ESG reporting services help address and approach issues fitting into environmental, social, and governance categories.
According to experts at BoardRoom, environmental criteria often considers how a company protects the environment, including the corporate policies that address climate change.
With adverse impacts of climate change, such as the ‘climate change bankruptcy’ of PG&E (Pacific Gas and Electric), investors are looking at how business operations disclose and manage their effects on the environment. The specific environmental issues may include carbon emission, water pollution, and deforestation, to name a few.
Social criteria examine how companies manage relationships with customers, suppliers, employees, and communities where they operate. This includes workplace policies, workers’ rights, human rights, employee training, wages, and DEI (diversity, equity, and inclusivity).
Are the conflicts in a business’s headquarters? Is the business organization utilizing child labor? Are employees on strike? All these questions are helpful in the light of political instability or social unrest. The presence of policies or conflict that runs counter to investors’ values will affect a company’s reputation in the business community. Sharing obstructive views adversely impacts value, making it unattractive for future investment.
Governance deals with companies’ shareholder rights, internal controls, audits, executive pay, and leadership. Its standards ensure that companies are using transparent and accurate accounting methods.
It also ensures leadership is chosen using the right procedures, and its main purpose is to eliminate and lessen conflicts and corruption within a business organization. It may as well include the following:
- Board diversity
- Equal pay/gender equity
- Executive pay
Is ESG Suitable for All Business Sizes
While large companies can afford to have a dedicated team to take care of their ESG measures, small businesses may benefit from flexibility, faster decision-making, and close contact with clients, helping them understand their needs better.
Using renewable energy and digital receipts are small steps that will go a long way toward helping small businesses minimize their carbon footprint and save money.
As investors look to invest in companies with higher ESG standards, SMEs (small and medium enterprises) with stronger ESG focus can attract interest. Simply put, having higher standards often lowers the risk profile of SMEs by reducing regulatory/operational challenges and adding to their growth.
Considering that EGS issues are intangible, normally, there is confusion around ESG scores and analysis. ESG analysis is often undertaken by third parties to help investors identify ESG risks. Analysts use metrics to assign numerical scores against ESG metrics.
Moreover, ESG scores consider the future goals of a business alongside current performance as a commitment to ESG practices. Markets use the resulting ratings of ESG to determine companies’ investment potential and long-term value.
ESG performance depends on ESG analysis and scores. A business might have admirable ESG practices in place. However, if the details aren’t communicated clearly, they can be translated into scores. This explains why ESG reporting services are becoming important for many businesses.
There is a way of ensuring consistent data reporting and collection. But the growing dependence on ESG reporting incentivizes organizations to uphold responsibilities and push global issues up the agenda.
Getting Started with ESG
As mentioned, ESG encompasses various protocols, techniques, and standards. If you want to build ESG strategies, it will be best to start with simple approaches. Among the most effective pieces of the ESG puzzle, environmental sustainability is simple for many companies to approach successfully. All they need is to do the following:
- Develop a good environmental risk management plan
- Incorporate smart additions to ESG strategies
Most sustainability-focused businesses are furthering ways of improving ESG insights, whereas others are starting to implement new policies and collect ESG data. Some of these ways include the following:
1. Impacting Financial Performance
Research shows that businesses with a more sustainable program have already outperformed those without. Investing in sustainability means improving efficiency and creating cost savings, leading to better profitability in the long term.
Now more than ever, investors recognize the importance and value of ESG performance and are making investment decisions depending on businesses, which have more commitment to ESG. This helps to provide better opportunities for developing sustainable models, helping businesses grow and benefit their employees and customers.
2. Attracting Lenders and Investors
Including ESG reporting in separate disclosures or earnings reports are trending among companies. Lenders and investors are becoming more attracted to business organizations, which use ESG disclosures and invest in ESG to shed light on sustainability efforts.
Some reports show that 51% of investors are more interested in sustainable funds. The same reports also estimate that ESG investments will double in the next two years.
Business innovation is among the mechanism of progress. But it is also clear that there are some you can’t solve through making profits alone. As a matter of fact, some are created as by-products of the business itself.
As a business leader, you are bound to optimize resources and strategies to maximize returns. This can make you assume that you don’t have the duty of caring about ESG.
However, the truth is that taking ESG part of your business strategies will help you unlock growth opportunities and future-proof your business brand.
Infographic provided by Donnelley Financial Solutions, an ESG reporting platform