What is ESG and Why Should My Business Pay Attention?

When it comes to the alphabet soup of corporate sustainability, ESG (Environmental, Social, Governance) may seem like the latest fad. To investors, it’s different. You may be wondering: 1) What is ESG? 2) Why is it gaining so much attention? and 3) What does it mean for my business?

I Give, Therefore I’m Good! (Right?)

For decades, corporations maintained positive public relations by serving in a philanthropic capacity. Donating to charity, supporting scholarship funds, bankrolling a local foundation, or sponsoring community events. While philanthropy plays an important role, today’s global community is calling for more than donations. Companies (perhaps yours) today find stakeholders demanding leadership and transparency on corporate governance, social justice, and environmental issues.

The movement, called Environmental, Social, Governance (ESG), continues to gain traction in many stakeholder circles and shows no sign of slowing. And there’s big money involved. So what is ESG, and what could it mean for your business?

Let’s take a quick look under the ESG hood.

The Customer is Always Right

As of recent decades, customers seek products from responsible companies that align with their values. Amid a global focus on climate change, many customers are voting with their dollar. Besides purchasing products and services that meet their needs, customers also seek a sense of “feel good” by supporting socially conscious brands striving to make the world a better place, while also earning a profit.

A 2018 Nielsen study found 48% of consumers would “definitely or probably change their consumption habits to reduce their impact on the environment”. Consumers validated the survey results by spending $128.5 billion on sustainable fast-moving consumer goods (FMCG) alone in 2018. That number is only growing.

Purpose for the People

Employees desire to work for employers who can offer purpose. A 2018 survey of 2,285 professionals in the U.S. across 26 industries found 9 out of 10 workers were willing to trade a percentage of their lifetime earnings for greater meaning at work.

Just how valuable is a sense of purpose to employees? Those professionals said they’d be willing to forego 23% of their entire future lifetime earnings to have a job that was always meaningful. Strong ESG performance transparency can attract purpose-driven individuals to your company. Positive ESG ratings can also boost morale for the talented stock of existing employees.

Follow the Money

However, the most powerful driver of ESG escalation comes down to investors. You may be familiar with the terms “sustainable investing”, “impact investing”, or “responsible investing”. All of these terms relate to ESG.

According to a 2020 report from US SIF Foundation, ESG investing now accounts for one-third of total U.S. assets under management, or $17.1 trillion, up 42% from 2018.

For example, a robo-investor my household uses introduced “Socially Responsible Investing” portfolios at the end of 2019. These funds allow everyday investors (like me!) to have a say in the types of companies their hard-earned dollars support. With increasing investment transparency, many consumers feel a responsibility to invest in companies that align with their personal values.

The truth is, ETF advisors, asset managers, and third-party agencies are analyzing your company on ESG for risk mitigation. They’re doing so for two primary reasons:

  1. Increased market demand for environmentally- and socially-conscious investment funds
  2. ESG-minded companies outperform the general market.

The demand for transparent investing shows no sign of slowing down. While ESG disclosure is currently voluntary, many financial experts envision ESG performance as a gatekeeper to capital. For example, companies that fail to take a stance on ESG may risk losing access to capital to competitors. Boards and industry leaders see the writing on the wall: A positive feedback loop doubling down on ESG.

The “E” in ESG

While the world of ESG reporting is converging, a single unified reporting standard or framework does not currently exist. For the time being, it’s up to businesses to voluntarily disclose the ESG priorities and subsequent performance. For many business leaders new to ESG, choosing ESG metrics and goals can be a daunting prospect. Many leaders are unsure where to start.

Solutions in Sustainability helps businesses tackle the “E” (Environmental) in ESG. Whether facing demand from investors, employees, or customers (or all three), we help firms develop strategies to reach their energy-related ESG goals. We exist to help companies mitigate energy-related business risks, improve ESG transparency and performance, and gain access to capital.

About the Author: Alex Kaufman is a science communicator, clean energy specialist, sustainability nerd, professional engineer, travel enthusiast, and resident of San Diego, California. When not helping clients, you can usually find him cycling, hiking, reading, spending time with loved ones, or planning the next big adventure. He is open to speaking engagements. Contact him at alex@alexkaufmanpe.com.

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