ESG (environmental, social, and governance) criteria refer to companies’ framework to assess their sustainability. According to experts at BoardRoom, many large businesses have ESG programs. But most ESG efforts aren’t fully established, and some businesses have yet to start.
Outlook of the 3 Pillars of ESG
ESG mainly focuses on different issues associated with environmental, social, and governance of corporate practices. ESG programs document the impacts of the company on stakeholders and the environment, as well as their approaches to governance.
In addition, ESG assesses potential business opportunities and risks in each of these three pillars. Here is a further breakdown of ESG:
Environmental
Perfect examples of environmental factors include greenhouse emissions, water usage, and energy consumption. It may also include overall carbon footprint, water/air pollution, adaptation to climate change, biodiversity loss, deforestation, and waste management.
Social
Social aspects often examine a business’s relationships with external and internal stakeholders. SRI (socially responsible investing) refers to an investment strategy highlighting this aspect of ESG.
Most SRI investors look for companies promoting socially conscious and ethical themes, including corporate ethics, social justice, community focus, inclusion, diversity, and going against sexual, gender, and racial discrimination.
Governance
This covers how businesses are controlled and directed, plus how business leaders are held responsible. Improved transparency in governance is becoming an expectation. Examples of topics related to governance are the following:
- Political contributions
- Board elections
- Independent directors
- Staggered boards
- Takeover defense
- Shareholder rights
- Executive compensation
- Open configuration options
Why ESG is Important for Businesses
There are numerous reasons why ESG consulting is helpful to business organizations. An increased number of money managers have a solid ESG focus and don’t invest in any company unless a business owner meets specific ESG disclosure thresholds.
Through ESG, public companies and related subsidies working in certain jurisdictions must stay privy to evolving regulatory environments to comply with evolving requirements. For instance, the US Financial Stability Oversight Council has identified climate change as an increased threat to financial stability. Municipalities have as well started to develop sustainable policies for making investments.
People offering risk, legal, or compliance management support may advise you on how to adhere to regulatory requirements related to ESG. These people may also provide insight into the resources needed to comply with all the ESG-related policies.
Another benefit of ESG is higher profitability. ESG businesses with higher ratings were more competitive and showed abnormal returns. This lead to higher dividend payments and profitability, especially if contrasted against ESG business with lower ratings. Other benefits of ESG include the following:
- Industry leadership opportunities
- Preventing corporate activism
- Mitigating volatility
Can ESG Hurt Your Portfolio?
The answer is a simple no. Gone are the days people used to say that ESG investment is about making sacrifices. On the contrary, ESG investing is growing rapidly, with assets having a value of between &8.8 trillion and $12.3 trillion.
How to Get Started with ESG
The risks associated with ESG issues are part of every business’s regular risk factors. Whether business ethics, products, employee relations, data security, or emissions, potential damages because of mismanaging issues related to ESG are greater than expenses related to mitigating risks.
But where will you start?
Experts have created a solid guide to help you better understand how ESG consulting works and which steps to take to sustainable ESG. Some of these steps are:
1. Deciding What to Be Committed
It is simple to say you will be an ESG business in the future. However, greenwashing, where you say you will do many good things for society and the environment but never do, is very common.
Because of that, people will hold you responsible. If you are always keen, you have heard protestors pointing out how much greenwashing has been.
So dig in and only move forward when you are certain that you will give your all. While doing that, don’t underestimate how putting your business operations and vision under a new lens can improve someone’s satisfaction with your business and work.
2. Engaging with a Prioritized Stakeholder
Refining and building your ESG consulting strategies needs to be directed by stakeholders your business affects. Knowing who they are, who you need to prioritize, and how they get affected by your business operations will show your whole strategy.
Determine which stakeholders you need to prioritize by looking at every group’s influence on the entire organization from the outside in. For instance, if there are people who get a raw deal, which can be prevented, find out first and make a solid plan to take the right steps.
3. Identifying Your Priorities and Values of ESG
If you ask most professionals how you can get started with ESG investment, their response will be – to identify your priorities and passions first. To achieve this, ask yourself what issues resonate with you and what kinds of businesses you want to exclude or include in your investment portfolio.
For most investors, ESG encompasses avoiding business organizations that contribute negatively to climate change or use fossil fuels. But for others, ESG is all about investing in businesses committed to plant-based innovations or energy. Some investors prefer focusing on social issues. According to them, the following are priorities:
- Human rights
- Labor standards
- Corporate social responsibility
- DEI (diversity, equity, and inclusion)
4. Building a Roadmap
Your ESG projects will only succeed if you support them with a roadmap outlining your company’s milestones, goals, and ambitions.
Setting up a roadmap means there will be a liability for important initiatives. A solid roadmap for rationale, milestones to watch out for, explaining your targets, and implementation will also enable you to attain buy-in from the public, investors, employees, and stakeholders.
Conclusion!
Different investments weigh ESG factors differently and focus on various criteria within factors. Investments without an ESG term can still incorporate elements related to ESG investing in their investment portfolios. If an investment is an ETF or mutual fund, you may learn more about how they incorporate ESG and weigh ESG factors by reviewing its disclosure documents.