What is ESG (Environmental, Social and Governance), and Why is it a Business Critical Focus?

Across the global corporate landscape, ESG (Environmental, Social, Governance) has become a business-critical focus as companies respond to and realize their role in financial, environmental, and societal concerns.

It is no longer a "nice to have" framework or future goal; it's now crucial to companies thriving in a world where external audiences, key stakeholders, and financial communities have a larger voice in how companies are making progress with ESG goals.

Below we share some ESG insights to help you understand why these criteria exist and how your company can align for future growth and sustainability.

What Is ESG?

ESG stands for Environmental, Social, and Governance. Together, these three aspects make up a framework to evaluate factors pertaining to a company’s long-term health and prosperity. For many investors, it’s not enough to check off two boxes and leave one totally blank. They’re searching for thoughtful, forward-looking policies and programs in all three of these areas.

Environmental

What kind of impact is your company having on the environment?

This can encompass issues of carbon emissions, runoff, disposal procedures, pollution of all kinds, resource efficiency, biodiversity, and history with environmental regulatory bodies.

If your company is falling short in terms of environmental responsibility, it will increasingly raise flags in the eyes of investors and stakeholders. On the other hand, excellent environmental stewardship can show commitment and capability to follow through.

Social

What kind of relationships does your company have with the people in its ecosystem?

This covers how your company manages relationships with its employees, customers, suppliers, partners, and communities.

Here’s where your employee treatment, benefits, pay, and diversity will be evaluated along with your company values and how they have (or haven’t) been put into practice. Matters of human rights, sourcing, customer service, and customer protection will also factor into this criteria, as well as the social impact that your operations have left on the surrounding area.

Governance

How does the board of directors run the company?

This aspect involves examining the executive governance of the company. Investors will evaluate stakeholder incentives, executive compensation, bonuses, prioritized metrics of success, matters of corruption, conflicts of interest, levels of transparency, and the hierarchy of governance.

Two decades ago, a framework like this could be categorized as a special interest. Today, it amounts to due diligence. No one wants to complete an acquisition only to be unpleasantly surprised. ESG helps to surface relevant risks and liabilities so buyers can make accurate decisions based on the past, present, and prospective future of the company.

The Role of ESG in Investment

As the greater landscape of industry shifts beneath our feet, a crucial element is quietly evolving with it: the expectations of investors.

To determine the value of a potential investment, firms have begun using a specific set of criteria designed to evaluate a company’s sustainability. These ESG criteria ask: how well will the company hold up to environmental scrutiny? How strong are its relationships in its social ecosystem? Is leadership transparent or will they end up in the headlines in a few years?

The above questions address investor priorities that have been developing for years. But with ESG standards, they’ve gotten better than ever at asking them.

The Real Impact of ESG

The corporate world has turned a corner on the voluntary adoption of ESG standards. A review of ESG initiatives across S&P 500 firms found that the percentage of firms releasing voluntary disclosures increased from 35% to 86% between 2010 and 2021.

With more of the business world participating in ESG initiatives and reporting, there is now a historical record being written that shines a light on the real impact of ESG initiatives.

Recently the Kenan Institute at the University of North Carolina took a look at the environmental, social, and economic gains realized by organizations that embraced ESG.

The study posits that the power ESG investors wield influences positive social and environmental action within corporations wishing to earn those investment dollars.

In some cases, the very anticipation of sweeping government regulation has been enough to prompt greater investment in long-term sustainable initiatives, with the increase in ESG investment seeing a correlated emissions decline of 2.2 and 3.6 times faster.

While there is a long road ahead to see how much change will ultimately result from the expansion of ESG initiatives around the world, the short-term data shows that we are already seeing real, measurable results. And with the urgency of climate change and its broader social impact, any step forward is still a step in the right direction.

ESG Trends and Global Perspectives

ESG professionals from member organizations of Innogen Alliance are making strides in developing more impactful ESG frameworks and practices. Here are some of the topics that are driving ESG initiatives around the world.

ESG and CSR: What’s the difference?

The mounting impact of climate change has spurred businesses and governments to take action toward sustainability. However, there is a lack of consensus on some standard sustainability terms, which can lead to confusion.

This is particularly evident in the varying definitions of Corporate Social Responsibility (CSR) and Environmental, Social, and Governance (ESG) used across different countries and regions.

• Learn more about the difference between these two terms.

Megatrends impacting ESG

Dan Bena, ESG/Corporate Purpose Executive with Antea Group, identified the five top megatrends driving more organizations toward ESG initiatives:

1. Greenhouse Gas emissions, especially CO2 emissions
2. Rising sea levels
3. Citizen actions and protests
4. Green energy
5. Climate neutrality

Given the far-reaching social and financial consequences of these issues, it is unsurprising that there has been a growing call for change and action. Such action is now closely tied to ESG initiatives.

Key drivers of ESG

Companies must take into account several key drivers and stakeholders when developing their ESG strategies, including:

• Financial uncertainty is driving more investors toward portfolios deemed more stable, including ESG-rated investments.
• Society and consumers want to spend with brands that demonstrate social purpose and sustainable environmental practices.
• Policies and regulations are in place that require greater adherence to ESG-aligned principles.
• Markets, which favor companies that successfully integrate ESG into their operations, including responsible supply chains.

Corporate ownership of ESG

Organizations are increasingly placing ESG initiatives under the purview of the C-Suite. This includes the CEO, the Chief Sustainability Officer, and increasingly, the Chief Financial Officer (CFO) for financial reporting.

This shift emphasizes the need for more comprehensive reporting and reliable data to meet the expectations of stakeholders for ESG and reporting frameworks.

• Learn more about the latest trends in ESG.

Further, you can check out an in-depth ESG blog from our partners at Antea Group for more on how it relates to EHS&S (Environment, Health, Safety, and Sustainability), and why it's rising on the radar of business leaders globally.