An introduction to ESG
Environmental Social Governance are criteria of a company’s activities which influence the environment and society. ESG-criteria are amongst the most important criteria which can be used within sustainability and quantifying investments within a company or economy. These three dimensions support the social contribution of a company on every aspect and enable companies to make a financial analysis in which they can combine sustainability and profitability.
Investing in ESG
Environmental Social Governance (ESG) is often portrayed as an inhibitor to profit, but this can be evidenced as a mistaken belief. Certainly, when viewed against a backdrop of short-term quick profits, ESG can appear to be another burdensome demand on corporate executive time. However, implementing effective, robust strategies to satisfy the critical criteria of ESG will exponentially benefit any business in any sector. Interest in ESG has rapidly risen over recent times. Approximately $41 trillion is expected to be allocated in capital to ESG funds by 2022.
ESG commitments are challenges which must be overcome. This leads to a culture of innovation from the top levels of businesses now having to adapt even more since the pandemic and the Ukrainian war.
An environmentally sound operation will be more sustainable and future-proofed. It will also appeal to the markets (gen Z consumers are willing to spend 10% more on sustainable brands) and reduces negative public relations. Additionally, energy efficiencies have an obvious cost bonus as well (Gen Z and Sustainability: Bringing Value to Their Dollar, 2022).
A good social policy is essential for an increasingly socially conscious public. Ethical and equal employment policy attracts a higher grade of applicants for positions and increases the retention of skilled staff.
Poor governance can lead to legal penalties, licensing issues and negative brand impacts to name but a few. Corruption will always eat into profit, efficiency, and the overall survival of any business. Many government agencies and private sector stakeholders will expect a strong application of ESG to even consider doing business.
Establishing purpose is critical to expanding the total value of the enterprise so that both investor and stakeholder value increases in the long term.
However, there is more to the story. Companies which score highly in ESG factors that are material to their industry yet poorly in immaterial factors have been found to outperform their peers by a statistically significant percentage. Investments in ESG often require trade-offs, and the most productive investments appear calibrated to ESG factors that are highly relevant to the business in question, such as environmental protection for a natural resources company or customer privacy and data security factors for a technology company.
Thus, whilst being altruistic and beneficial for the world, ESG will also strengthen your business’s profits, innovation, resilience, and reputation and build a sustainable economy for our today and tomorrow.
In case you have become interested, I have added some sources which elaborate on the topic. ‘Grow the Pie’ focusses primarily on how to make more profit when adapting to ESG. On the other hand, ‘A Circular Economy Handbook’, aims to create a durable business model which is build around sustainability.
Interesting reads on ESG:
Gen Z and Sustainability: Bringing Value to Their Dollar. (2022, 27 april). TEAM LEWIS.https://www.teamlewis.com/magazine/gen-z-and-sustainability-bringing-value-to-their-dollar/
Edmans, A. (2021). Grow the Pie: How Great Companies Deliver Both Purpose and Profit – Updated and Revised. Cambridge University Press.
Weetman, C. (2020). A Circular Economy Handbook: How to Build a More Resilient, Competitive and Sustainable Business (2nd Edition). Kogan Page.