How corporations meet ESG. Best practices.

How corporations meet ESG. Best practices.

Pressure and market trends, regulatory compliance requirements and opportunities to raise capital – all this makes companies develop in an increasingly conscious and sustainable way. Requirements from regulators, investors, lenders, as well as employees and consumers themselves are directing enterprises towards responsible business – ESG can bring this goal closer.

What is ESG?

ESG (Environmental, Social and Corporate Governance) is an abbreviation for a number of non-financial factors that will help companies report their activities not related to purely economic development indicators. These are the following indicators E – Environmental, S – Social and G – Corporate Governance. The precursor of ESG standards is the concept of CSR (Corporate Social Responsibility), i.e. corporate social responsibility. However, the ESG methodology relies on a more measurable assessment of the adopted goals, and CSR could be used in marketing activities only to create a specific image of the company without any moral considerations.

Why is ESG important?

Recently, the problem of climate change is very visible, which is why corporations are forced to take appropriate action. The costs of climate change-related extreme weather run into the billions for every single disaster. Therefore, while the cost of adaptation and mitigation can be significant, the costs of uninsured losses far outweigh the costs of proactive mitigation. Therefore, companies do not have to be guided only by moral considerations, but also by economic ones. In addition, the amount of waste produced and water consumption are increasing drastically.

World plastic production in 1950 was 2 million tons. Now it is 460 million tons. Since then, production has increased 230 times!

Human rights violations, discrimination and safety in the workplace are widely discussed. The social aspect of the ESG raises such issues. Let’s look at the example of the textile industry. In fast fashion, one often hears about disrespect for human rights. Every sixth person in the world of working age works in this industry, and only 2% of them earn above the poverty line. In addition, employees work a dozen or so hours a day without any insurance and without breaks from work. Moreover, employees receive less than 1% of the amount allocated for the purchase of a given piece of clothing!

When it comes to corporate governance, the most detrimental problem is corruption, which effectively contains the company’s development. The graph below shows the GDP per capita and the Corruption Perception Index in particular countries. It is clearly visible that the countries with the highest index are among the poorest in the world.

This is because corruption is a tremendous barrier to development. We observe the same phenomenon when it comes to the operation of companies. Corruption results in financial damage. Examples of such is a damaged reputation of the business, which causes fewer business opportunities. Following this loss of finances, the damage to morale will affect employee productivity. A loss in productivity leads to further losses in profits.

There are many such examples, but the conclusion is the same non-financial factors are of enormously great value for a company and its environment’s prosperity.

Moreover, market pressures and trends, compliance requirements and opportunities to raise capital and other factors make it very difficult for companies that do not adhere to ESG to operate, and its importance will only grow. 

How to successfully implement ESG strategy?

• Measure and assess state baseline –  it’s recommended to assess current programs, policies, metrics, and engagements within your company. Following up on specifics and collecting more detailed insights is of great value. The company may do it by gathering information from reports, policies, and data systems. Determining the current state will make it easier to define the company’s goals and their subsequent control.
• Set clear, measurable goals – it is crucial to define what sustainability and ESG mean for your organization. It is important that all employees are involved in this process because then they feel part of this project and are more motivated to act. Without a shadow of a doubt, each company has different needs and plans, and as a result the goals must be individual. It is necessary to determine what are the company’s strengths and weaknesses, and to set development priorities. Moreover, the company should ask itself: What does it want to keep? What does it want to improve? What does it want to optimize? It is important that the goals are realistic, measurable, understandable and with a date of implementation. However, it should be kept in mind not to do this goal-setting step of the process too quickly.  The company must focus on quality not quantity.

• Create a budget – great plans are worth nothing if they are not feasible. That is why it is crucial to define a financially possible budget for this purpose. It should include considerations of cost, returns and savings. In addition, you need to calculate ROI to see how fast the process is yielding results. The advantage of investing in an ESG framework is that the benefits are not just financial gains. Other positive impact indicators include the many benefits to people and the planet. Moreover, it is worth noticing that green projects are prone to attract private investment and government’s funding in an effort to tackle climate change.
• Sustainability Guidance Team –  the team of sustainability advisors will ensure that the organization develops in the right direction to achieve the established ESG goals within its framework. This is important because we are sure that they are professionals in this field and are able to set a specific action plan to achieve the intended goals. The purpose of this group is to constantly strive for the ESG framework set by the company due to setting a course of action, measuring results and introducing possible corrective actions.
• Compliance with regulatory frameworks – Investors appreciate investing in companies that adhere to recognized timelines. This increases the credibility of the company on the market and increases its value. It is important that the planned dates are achievable for a given company because each company has a different environment and possibilities of implementation.
• Check your progress – as we know, companies operate in a very complex environment that requires constant monitoring and evaluation in order to make the necessary adjustments. When businesses keep abreast of industry research on the latest trends and developments, and leverage industry standards can continuously develop and enhance its outcomes and be sure they are going in the right direction.

What are the benefits of ESG?

1. Statistics show that companies with better ESG metrics deliver higher returns on equity, lower risk and a lower cost of capital.

2. ESG data are very useful to identify investment opportunities in companies. It shows whether financial conditions are proper and if firms meet social responsibility objectives.

3. Appropriate and sustainability reporting enables investors to evaluate the company’s long-term strategy. Environment in business is continuously changing, and as a result it is critical to be up-to-date.

4. Reporting on ESGs allows investors to assess whether companies are accomplishing their commitments regarding environmental, social and governance issues. If any field requires improving, it will be easier to implement proper action. 

5. Companies with good ESG scores attract more gifted employees and have longer retention. Having a clear sustainability agenda contributes to internal sense of pride among employees. As per a study by Cone Communications on Millennial Employee Engagement in 2016, 64% of Millennials consider a company’s social and environmental commitments when deciding where to work.

Takeaways:

With the growing importance and demand for climate action and social issues among consumers, the implementation of environmental, social and governance (ESG) measures is now critical in business. Paying attention to non-financial factors brings benefits for both the environment and the company itself. The importance of ESG is constantly growing and companies that do not comply with these requirements in time will not be able to function efficiently.