ESG stands for Environmental, Social and Governance. ESG is a means of sustainable investing used for assessing companies considering not only their financial returns but also, and especially, their social responsibilities.
The definition of ESG is based on 3 dimensions, also called ESG criterias which are:
- Environmental: refers to the impact that a company has on the environment like CO2 emissions, waste recycling practices, the use of renewable energy, biodiversity and nature conservation, treatment of animals, deforestation
- Social: means the social impact of the company through employment of minorities and people with disabilities, practices and services for the well-being of employees, fair employee compensation, the relationship between the company and the local community
- Governance: deals with how a company is managed, for example the quality of relations between managers, employees, and the various service providers, the fight against corruption, implementing accurate and transparent accounting methods, providing employee trainings
What is ESG investing?
ESG investing is a sustainable strategy that benefits businesses and investors by promoting positive societal impact. It considers matters such as the environment and human wellbeing, corporate responsibility and long-term financial performance.
This practice started in 2004 from a report by 20 financial institutions in response to a call from Kofi Anon, the Secretary-General of the United Nations. To answer the demands of institutional, retail investors, and public sector authorities, ESG investing has evolved in recent years to better incorporate long-term financial risks and opportunities into their investment decision-making processes and produce long-term value.
While ESG is the evolution of the concept of Corporate Social Responsibility (CSR), there are some differences among the two. Indeed, ESG metrics are more explicit, and better incorporated with broader sustainability frameworks.
Also, while the major CSR arguments for getting stakeholders on board with sustainability practices was to drive company’s costs down, ESG acts as a strategic lever that drives new growth opportunities and enhances performance.
Therefore, there has been a constant growth of ESG investing in companies due to the fact that investors are looking for opportunities that support and promote sustainability to tackle issues like climate change or biodiversity loss.
Benefits of ESG for companies
There are many benefits of implementing ESG for companies. According to a study by BlackRock, 81% of a globally representative selection of purpose-driven ESG companies with better investing profiles outperformed their counterparts in 2020, despite the market downturn.
Nowadays, more and more investors are attracted by the values of companies that drive positive change, because today’s consumption is done more responsibly. In fact, integrating ESG policies makes customers, suppliers and other collaborators feel more emotionally attached to the company. A McKinsey research has shown that customers are even willing to pay more to go green.
Generally, ESG implementation positively impacts companies’ cash-flows in 5 important ways:
- facilitating top-line growth
- reducing costs
- minimizing regulatory and legal interventions
- increasing employee productivity
- optimizing investment and capital expenditures
Moreover, it offers ESG companies a long-term competitive advantage. For example, when companies pay attention to customer privacy and security or promote workplace diversity as a driver of innovation, it creates a positive image appreciated by all stakeholders. This increases the retention of customers and employees, and the overall performance is positively affected.
ESG and SDG: what is the connection?
ESG strategy focuses mainly on the business community and companies actions while SDGs, which mean Sustainable Development Goals, is a broader terminology that includes more stakeholders in the game. United Nations (UN) members have adopted SDGs for the 2030 Agenda for sustainable development growth.
SDG goals cover all the current challenges of humanity with the overarching objective of achieving a global system that is more sustainable, healthy and fair for everyone.
The SDGs include 17 goals to raise awareness and resolve international issues like global climate change (through goals like SDG 13), biodiversity and animal welfare (SDGs 14 and 15), energy deficiencies (SDG 7), diversity (SDG 5 and SDG10) and working conditions (SDG 8), thanks to the cooperation and partnerships of various stakeholders all over the world.
SDGs and ESG strategy are interconnected, first because they share the same values: sustainability and inclusion approach to economic growth and well-being. Both ESG and SDGs bring concrete solutions for environmental and social issues, shifting the focus not only on short-term profits to shareholders, but strive to build long term value for everyone.
How to set up an ESG strategy?
The ESG implementation guide gives perspectives, guidelines and practical tools for companies to launch ESG, here are the 5 main steps to start implementing an ESG strategy:
Step 1: Conduct a Readiness Assessment
Members of the management team should identify the key long-term ESG risks and opportunities, investors and or stakeholders, and any existing risk management and or disclosure practices.
Step 2: Establish a Governance Structure
Companies that want to implement ESG must establish decision-making rights, responsibilities and oversight that must report periodically on their activities to the company’s board of directors. This work is most effective when overseen by a disclosure committee, but ultimately, each company must make its own decision on how to structure this work.
Step 3: Conduct Inventory and Assess Data Collection and Governance Practices
Quality and detailed investing data, collected from the start, are essential for decision making. To proceed, you need to:
- Generate a comprehensive inventory of the company’s internal efforts
- Develop an ESG rating and data framework to capture, collate, and track relevant data, whether or not the company will disclose that information
- Implement the proper protocols to ensure data is reportable, repeatable, and auditable for the ESG strategy
Step 4: Decide What to Disclose
Companies need to identify which data points, events, goals, or accomplishments to disclose. It is best to focus disclosure on stakeholder topics – especially investors, as they relate to long-term capital creation.
Step 5: Determine ESG Reporting &Communications Channels
Finally, it is time to choose the communication channels to reach your audiences:
- Consider creating a dedicated ESG report or microsite, for example to post its report in PDF format or HTML to maximize internet-based disclosure to ensure the probability that it’s read by the audience
- Determine whether the company will create an integrated report that combines ESG factors with financial performance
- Leverage the company’s website and social media capabilities to strengthen the sustainability narrative
How to start an ESG strategy supported by OutBe?
OutBe is an innovative startup that supports companies in creating and implementing a sustainable brand, by acting upon the wellness of the companies employees, conserving and protecting the environment, and engaging with local communities. So, how does OutBe help companies embed an ESG strategy?
- By practicing outdoor sports with your team: a great way to develop stronger relations between managers and employees, to maintain the physical and mental well-being of the teams, but also the relationships between the company and the local community.
- By investing in citizen science: acting positively on biodiversity and nature conservation to have an impact on the local environment. Data collected and monitoring experiences are shared with researchers thus contributing to strengthening ocean literacy.
- By engaging your team activities on nature-based solutions: increase your employees’ welfare and give them the opportunity to feel useful by protecting or restoring their local ecosystem, this will make them even more proud to be working for the company.