ESG 101: A Guide to Create a Sustainable Business
Successful companies know that their reputation is what matters in the long run because it affects the way people see their branding image and the overall probability of success as a company. They want to stay within the guidelines of what makes them different, have an impact on the world, and prevent any mishaps down the road that could have been avoided.
Except what are the guidelines? How do you know what is "good" and what is "bad?"
The essential answer to these questions would be the term ESG, not just because it helps your business out, but also helps the well-being of everyone. It's a win-win scenario!
What is ESG Exactly?
ESG investing, also known as responsible investing, is an umbrella term for different types of potential investments that consider environmental, social, and governance factors alongside financial analysis. Although it consists of a broad range of non-profit metrics, it is by no means something to overlook. Each section is a key factor in how well a company performs, so understanding the principle behind ESG will help entrepreneurs separate themselves from the average company.
What are examples of ESG?
As said above, there are 3 central factors that come with ESG: Environment, Social, and Governance. Each one has its own respective category that affects many business activities
Environmental criteria include a company's use of renewable energy sources, energy efficiency, its carbon footprint on the earth, its waste management program, how it handles potential problems of air or water pollution arising from its operations, deforestation issues (if applicable), and its attitude and actions around climate change issues.
Other possible environmental issues may include raw material sourcing (for example, does the company use fair-trade suppliers and organic ingredients?), and whether the company follows biodiversity practices on its own land or controls. All of these can lead to an environmental impact if utilized correctly.
Social criteria focus on a variety of different issues related to ethical impact. There are many different types of ESG. Social criteria include a business' diversity policy; its treatment for employees; its stance on LGBT rights; its involvement in politics; and its approach to unions. Socially responsible investors look at the relationship between companies and their employees as one of the most important factors when investing.
With ESG-concerned investors, it can make a big difference in the evaluation of your company if you consider some of the examples below:
- Provide free resources available to all employees or other types of benefits that aren't common at all workplaces
- Distributing employee pay that's fair, or even generous, compared to comparable jobs or similar positions throughout the industry
- Showing employees different types of retirement plans so they can choose what works best for them. This can also be added with certain perks and/or benefits
- Implementing policies regarding diversity, inclusion, and prevention of sexual harassment at work
- Offering Employee training and education. What opportunities exist for employees to learn new job skills at the workplace that will qualify them for better-paying jobs?
- Does your company offer any type of financial support for continuing education or flexible work schedules for employees interested in pursuing further education? What about opportunities for existing employees to learn new job skills at the workplace that will qualify them for better-paying jobs?
- What's the company's mission statement? Does it benefit society and have moral values? Culture and beliefs can't be measured by a single metric. It involves everything from the way people interact with each other, collaborate across functions, and the values and ethics they live by.
- Are there good employee relations with the management of your company? Do employees have varying degrees of input in determining operational procedures within their departments?
- The level of employee turnover in the organization is another issue. Are current employees happy enough with working conditions and compensation to stay employed? If not, why not? Do they plan on staying if given more flexibility or better compensation? Or are they planning on leaving?
- How well are customer relationships managed? Does the company engage with customers on social media? How responsive and efficient is the customer service department? Does the company have a negative history of consumer protection issues, such as product recalls?
- Does the company take a public or political stance on human rights issues? Does it donate money to charitable causes and the social aspect of ESG?
- Having board diversity if applicable
All the examples above show ways that you can measure the health of your business as a whole. Even if you change just one social factor at a time, you'll get snowball effects and end up where you want to be with investors.
Corporate governance refers to policies and procedures designed to ensure transparency and accountability within a company's board of directors and senior management team. Board composition and independence, CEO successions, executive compensation, and shareholders' votes are the most common areas of focus for boards of directors.
Corporate governance includes both internal and external factors. Internal factors include corporate strategy, risk management, and organizational culture. External factors include government regulations, media coverage, and investor sentiment.
• Corporate Strategy: The strategic direction taken by an organization and its ability to achieve desired business goals through effective use of resources. The strategy should be developed and communicated early in the life cycle of an organization. Strategies may change over time as circumstances dictate.
• Risk Management: The systematic approach to identifying and managing risks associated with operating an enterprise. Risks must be identified and evaluated based on potential consequences to operations, reputation, and cash flow. In addition, the appropriate response to any identified risk needs to be determined.
• Organizational Culture: A set of shared attitudes, beliefs, behaviors, and expectations that define who we are as an organization. Organizations strive to create cultures that foster innovation, encourage creativity, support high performance, and reward integrity.
• Government Regulations: Laws and other governmental bodies that regulate the activities of businesses in various industries. These laws typically address topics such as health, safety, environmental protection, workplace relations, financial reporting, and advertising.
• Media Coverage: Public attention paid to an entity by news organizations, magazines, blogs, and social media sites.
• Investment Philosophy: The overall market perception of an industry or firm. Investors analyze companies in terms of their future prospects and then make decisions about whether they want to buy shares in them.
Why is ESG good for business?
ESG is an investment, not a cost. The whole idea of it is that you are a sustainable company and that you are doing business responsibly. This means transparency and applying ESG standards and policies to one's operations. In 2015, Bank of America decided to reevaluate its practices and established more businesses with renewables, adjusted its employee contracts and promoted diversity in the company and senior management. The company was able to create $16.5 billion in revenue that year alone.
Of course, not all sectors of the economy face the same ESG issues. For example, when it comes to the environmental risk for certain companies (e.g., JP Morgan Chase), greenhouse gas emissions are less important than they are in the case for energy (e.g., coal). If you look at other companies that are focused on remote work (like Twitter, Dropbox, and Upwork), they will have different challenges and opportunities because of the atmosphere they have created for themselves.
As mentioned earlier, ESG is sustainable investing, but some investments have higher returns. For instance, investing in renewable-energy projects has a return rate of 10–50 times the return rate of traditional power generation. Other examples include investing in socially responsible funds, which have a return rate of up to 20 times the return rate of low-risk equity portfolios and investment funds.
How Are ESG Scores Calculated?
ESG research firms score companies across a wide range of criteria, making them easy to analyze. While the specifics of the assessment vary from company to company, ESG rating firms typically assess things like annual reports, company sustainability measures, resource/human resources/financial management, board composition and compensation, risk factors that affect the environment, even contentious weapons screenings.
How Do I Make My Business More ESG?
There are several ways to make your business more ESG, including the following:
1. Be transparent about your values: People want to work with businesses that share similar values and beliefs. This can be done through advertising and marketing, employee training, and other forms of communication.
2. Think long-term: Rather than focusing solely on short-term profits, think about what you're doing next year, five years down the road, and even 10 years after that. You may find that you have less profit this year because it takes time to build up your brand, but it could pay off big dividends down the line.
3. Engage stakeholders: Your customers, clients, partners, employees, and community members all play a role in helping shape your business' reputation. Stakeholders can help you identify opportunities for growth and also provide feedback on the impact your decisions have on society.
4. Integrate sustainability into your products and services: For example, a company could decide to only source materials from companies that employ workers who are paid fairly and treated well. It could also choose to not sell any products that harm animals.
5. Build a positive image online: By creating content that promotes good causes such as green energy and recycling, you can create a positive image for yourself and your business.
6. Become an advocate: When it comes to social justice, many people don't know where to start. But by becoming an active voice for equality, you will gain respect from others.
7. Join organizations that promote socially responsible behavior: There are numerous nonprofit groups out there dedicated to promoting change within their communities and around the world. Joining one of these organizations can give you access to resources, information, and networks.
8. Conduct due diligence: Before making a major investment, do some research to determine if the company has been involved in unethical or illegal activities. If so, consider how that might affect your decision to invest.
9. Invest in the future: Many large corporations have made significant investments in renewable energy projects over the past decade. These investments helped them reduce emissions while providing jobs and revenue.
10. Consider supporting sustainable initiatives: Many businesses offer discounts and/or rewards for purchasing certain products from companies that follow an environmentally friendly approach.
11. Learn what is being said about your company's practices: The media plays a key role in shaping public opinion and perceptions. In fact, the majority of consumers rely on news sources like newspapers, magazines, and television shows to get their information. So, learn what is being said about you and your business -- both positively and negatively.
Strong ESG performance leads to preferential treatment from investors compared to companies whose environmental or other practices may pose a greater financial risk. If you implement robust sustainability and ESG strategies, it'll increase business resilience and improve your overall company performance.