What is ESG and why is it important for business?
- What Is ESG?
- Why Is ESG Important for Business and How Does It Deliver Value?
Investors, governments, and stakeholders are increasingly demanding organizations to present their ESG framework to assess long-term sustainability. A strong ESG proposition can create immense value for business success. In this article, we discuss further why ESG is important for businesses.
What Is ESG?
ESG stands for Environmental Social and Governance. These are three key factors when measuring the sustainability and ethical impact of an organization.
The ESG framework helps stakeholders understand that sustainability goes beyond just environmental issues. It is a holistic concept about an organization’s ability to create long-term value in the world. Most socially conscious investors screen companies and investments through ESG criteria. Every business is intertwined with environmental, social, and governance concerns. With the COVID-19 pandemic, ESG became more crucial for investors, governments, and other key stakeholders as it safeguards organizations from future risks.
ESG is an integral part of how you conduct a sustainable business. Let’s talk about ESG and its elements that impact your organization.
- Environmental, or “E” in ESG – the element that looks at the environmental impact of an organization’s resource and energy consumption. This includes the energy your organization utilizes, the wastewater it discharges, and greenhouse gasses and carbon emissions it produces, among other environment-influencing activities. The rise of conscious consumerism led to organizations adopting carbon-neutral commitments and investing in climate action. Environmental measures are now more important than ever for companies to thrive in the present and future.
- Social, or “S” in ESG – the element that addresses how an organization interacts with the communities where it operates. This addresses a company’s labor relations, diversity, and inclusion, among others.
- Governance, or “G” in ESG – is the element that looks into the internal practices, procedures, and policies an organization adopts to govern itself, make decisions effectively, and comply with the law.
Why Is ESG Important for Business and How It Delivers Value
More and more businesses are realizing the multi-faceted benefits of ESG such as facilitating top-line growth, leading to cost reduction, attracting talent, uplifting productivity, reducing regulatory interventions, and forging a sense of consumer trust. In general, ESG equips organizations to become more successful in the current and more resilient to possible future risks.
Facilitates Top-Line Growth
With a strong ESG proposition, it becomes easier for a business to tap new markets and expand their operations in existing markets. Why? Businesses with an ESG approach are more likely to be trusted by government authorities. When the government trusts your organization, they are more likely to award you by easing issuances of access, approvals, and licenses. ESG makes it easier to accomplish business objectives and attain growth opportunities.
For instance, in a major public-private infrastructure project in California, the for-profit organizations chosen to participate were screened based on their prior sustainability performance. However, a study found that the organization with social-engagement programs that were seen as beneficial by the public and other key stakeholders found it easier to extract resources, without operational delays or extensive planning.
ESG can also benefit a business because it drives consumer preference. According to McKinsey research, customers are willing to pay more to “go green”. Another recent study from the GreenPrint’s Business of Sustainability Index found that 75% of millennials are willing to pay more for an environmentally sustainable product, with Gen Z and Gen X following at 63% and 64% respectively.
Leads to Cost Reduction
Businesses with ESG propositions are more likely to be efficient and reduce costs significantly. Aside from the other benefits, executing ESG approaches can also combat increasing operating costs, such as raw-material expenses and the trust of carbon pollution.
As with any of the elements of ESG, the first step to realizing value is recognizing the opportunity. One company that recognized the competitive advantage of being proactive regarding environmental risk is 3M. 3M was able to save $2.2 billion when it introduced its “pollution prevention pays” (3Ps) program, which outlined pollution prevention through product reformulation, equipment redesign, and production waste reuse. FedEx also converted its entire 35,000 vehicle fleet to electric or hybrid engines, which reduced fuel consumption by over 50 million gallons.
Reduced Regulatory Interventions
All businesses are affected by some form of regulation depending on the market they operate in. Fortunately, a strong ESG proposition allows businesses to achieve greater operational freedom through eased-up regulatory pressure.
Organizations with ESG approaches invite less scrutiny from regulatory bodies and tend to face less pressure from activists or unions. For instance, Starbucks launched the “Starbucks China Parent Care Program” back in 2017. The insurance plan offered coverage to over 10,000 parents of Starbucks’ Chinese employees. It was perceived as a strategic move because, at that time, Starbucks was planning to expand in China amidst the trade dispute between the US and China.
Attracts Talent and Uplifts Productivity
It should be noted that businesses with great ESG scores also attract better talent and benefit from higher retention rates. Having a clear sustainability agenda instills a sense of purpose and pride among employees and ultimately, increases their productivity.
The stronger employees perceive the impact of their work on beneficiaries, the more motivated they come. A study also showed that positive social impact is correlated with higher job satisfaction. Hence, when an organization “gives back”, employees react with positivity and enthusiasm.
In an Australian bank, randomly selected employees received bonuses in the form of payments to local charities. These employees reported greater and immediate job satisfaction than their colleagues who were not selected. Keep in mind that just a sense of ESG-related purpose can motivate your employees to perform better, while a weaker ESG proposition can reduce productivity.
In this article, we have discussed what ESG is and why it is important for businesses. Businesses of all sizes must prioritize ESG policies for long-term benefits. Investors also screen companies through ESG criteria. Learn how Science Park of the Philippines SPPI’s ESG practices can help improve your business performance. Click here to get in touch with SPPI.