Environmental, Social, and Governance (ESG) is not new but has gained significant popularity recently.
According to Perillon, in 2020, ESG initiatives were already in place for 88% of publicly traded companies, 79% of venture and private equity-backed companies, and 67% of privately-owned companies.
These statistics highlight the importance and influence of ESG. ESG has the potential to cut costs, improve stock performance, and increase customer and employee loyalty.
In this article, we’ll dive deeper into the details of ESG and its impact on businesses and society. Stay tuned!
What is ESG?
ESG, which stands for Environmental, Social, and Governance, is a set of principles businesses use to guide their operations, considering their impact on the environment, society, and corporate governance. External investors use it to evaluate a company’s performance and associated risks.
More than just being about philanthropy, ESG isn’t limited to the positive effects a company can have. Instead, it can significantly enhance a company’s value. Thus, ESG becomes a business foundation that helps companies achieve long-term sustainability and growth.
What are ESG metrics?
ESG comprises three significant elements that can shape how investors and other stakeholders perceive the company.
This aspect involves a company’s interactions with the environment and their impacts. It includes sustainability practices that help companies use resources efficiently, protect the environment, and support social well-being, such as:
- Carbon footprint
Measuring the greenhouse gas emissions caused by individuals, organizations, events, or products. Companies can reduce their carbon footprint by using renewable energy, improving energy efficiency, or participating in carbon trading programs.
- Resource management
Efficiently managing resources like water and energy, reducing waste, and using raw materials sustainably.
For example, PT Kencana Energi Lestari Tbk, a renewable energy company in Indonesia, embraces ESG environmental principles by owning and operating hydroelectric power plants in Indonesia, showing its commitment to environmental sustainability in its business operations.
The social component of ESG is all about how a company interacts with its internal and external stakeholders, including:
- Labor practices
This includes everything from the conditions of employment, compensation, training, and development to the well-being of employees.
- Diversity and inclusion
How companies encourage and uphold diversity and inclusivity in the workplace. Companies can implement equitable hiring practices, provide training on bias and discrimination, and ensure all employees have equal opportunities and resources.
- Human rights compliance
Ensuring that companies respect and protect human rights during their operations. This means avoiding complicity in human rights violations and establishing effective mechanisms to address such issues if they arise.
- Community engagement
How companies make a positive impact on the communities where they operate. Companies can invest in charity, collaborate with local organizations, or support community initiatives.
One of the companies that implement this social aspect is Gusto. They initiated HR initiatives to reduce gender disparities in male-dominated teams, which was engineering.
They focus on recruiting female engineers and removing job listings with a masculine tone. As a result of these efforts, Gusto successfully raised the percentage of female engineers to approximately 20% by the end of 2015.
This aspect revolves around how the company is run and led. Ensuring that leadership efforts align with stakeholder expectations and doing internal controls are in place to encourage transparency and accountability among leadership.
- Board of directors structure
BOD should have a range of expertise to deal with ESG risks. They should also pay more attention to ESG concerns and guide their companies toward long-term success.
- Executive compensation
BOD must agree on which ESG issues impact the company’s financial performance and should be incorporated into executive compensation.
- Regulatory compliance
Companies must adhere to all environmental laws, labor regulations, and governance standards. This compliance must be monitored and reported openly and transparently.
Effective governance goes beyond simply following the law. It’s about building a culture of integrity that influences every aspect of a business. Everyone has a part to play in nurturing this culture and helping the company succeed.
ESG vs. CSR: what is the difference?
You might wonder if CSR and ESG are identical, but the answer is no—however, both fall within the broader sustainability category.
ESG principles highlight that sustainability isn’t solely about the environment; it includes a broader range of aspects.
In simple terms, while CSR and ESG promote responsible business practices and sustainable growth, they serve different purposes and are used in other contexts.
CSR is about a company’s internal commitment to social and environmental responsibility. At the same time, ESG provides a measurable and standardized way for investors and consumers to assess a company’s performance in these areas.
Integration into Business Strategy
In an era where sustainability is no longer a choice but a necessity, the integration of Environmental, Social, and Governance (ESG) factors into business strategy has become paramount.
This approach not only addresses the pressing issues of our time, but also unlocks new opportunities for businesses.
1. How to incorporate ESG initiatives?
Incorporating Environmental, Social, and Governance (ESG) initiatives into your business strategy is vital to sustainability. Here are the steps:
- Harmonize actions with values. Instead of minor improvements to your ESG approach, consider more extensive changes that authentically reflect your dedication to environmental responsibility.
- Cultivate innovation, drive transformation, and ensure accountability. Realizing business sustainability requires innovative thinking across several vital areas. Be prepared to bring significant transitions in your infrastructure, workforce, and operational processes.
- Assess and communicate progress. Establish meaningful objectives and communicate your ESG journey through transparent measurement systems.
- Engage with stakeholders. Prioritize ESG initiatives that resonate with your brand’s core values and actively involve your stakeholders.
2. Advantages of aligning ESG with company goals
Aligning ESG with long-term corporate goals offers several advantages:
- Attract talent and enhance employee loyalty. Organizations that align with employees’ values are more appealing to prospective talent.
- Boost customer loyalty and protect brand reputation. Sustainable businesses tend to gain more customer support.
- Enhance shareholder returns. Strong ESG practices can attract a broader investor base.
- Increase profitability. Companies incorporating ESG considerations into their policies and programs are better positioned among their competitors.
- Mitigate risks and build resilience. Understanding and addressing ESG risks can help companies adapt to change and ensure long-term resilience.
In conclusion, ESG is a strategic roadmap for businesses aiming for long-term sustainability and success. It advocates for the integration of ESG principles into business models and strategies.
Furthermore, it underscores the transformative power of ESG in creating a responsible and forward-thinking business landscape. By embracing ESG, businesses can become more resilient, adaptable, and competitive in a rapidly evolving world.
Corporate Finance Institute. “ESG”
Harvard Business Review. ‘’The Board’s Role in Sustainability’’
Investopedia. ‘’What Is Environmental, Social, and Governance (ESG) Investing?’’