ESG: The Key To Future Business Success
ESG: The Key To Future Business Success
In the world of business finance, ESG (Environmental, Social, Governance) is proving its worth. Much like the fabled tortoise, the steady pace of ESG adoption has delivered a massive win in the form of greater long-term business success.
Originally conceived as a method of corporate valuation, ESG reporting has been so successful that governments and agencies around the globe have adopted it as a standard by which organizations can satisfy mandatory reporting requirements.
Let’s take a closer look at why ESG frameworks are such a vital part of doing business, shaping the future of corporate finance and sustainability.
What Are ESG Frameworks?
ESG frameworks are guidelines for documenting and reporting corporate commitments to environmental, social, and governance goals. These frameworks are developed by international standards boards as well as governing bodies that mandate ESG reporting, such as government agencies, stock exchanges, and NGOs.
There are several different ESG frameworks to choose from. Which framework your organization chooses to use depends largely on the end goal of your ESG activity.
How Are ESG Frameworks Used?
This reporting framework originated out of a call by stakeholders to not only know more about the financial stability of an organization but also understand its commitment to long-term sustainability for people and the environment.
In many cases, ESG frameworks are used voluntarily to achieve a certain level of certification, such as being included in ESG stock portfolios, although there is a growing body of governments now requiring ESG reporting to ensure corporations are meeting regulations.
Why Is ESG Reporting Important?
The central purpose of ESG reporting is to demonstrate an organization’s long-term commitment to improved and sustainable action in the realms of environment, social, and governance issues.
Investor demand
The degree of self-examination and transparency these frameworks offer is good not only for key stakeholders but also for the business itself. ESG reporting has been around long enough now that data backs up the positive impact of corporations embracing ESG accountability.
According to a recent McKinsey report, sustainable funds saw an astounding 1,300% increase between 2018 and 2021. Organizations earn a place in these investment funds by having strong ESG ratings.
These investments also perform better over the long run, because the businesses behind the funds have taken a long-term view of building corporate wealth.
Corporate sustainability
By taking a deeper look at the lasting impact of business activity, organizations can enact changes that make them more resilient in the face of climate change, of greater value to local communities, and a place where top talent longs to work.
Bruce Simpson, Senior Adviser to McKinsey on ESG and purpose, recently said in an interview: “Stakeholder and shareholder interests do align in the long term. If you have happy employees, collaborative suppliers, satisfied regulators, and devoted consumers, then they will help you deliver higher benefits over a longer-term period.”
Regulatory compliance
A whole host of new regulations around environmental impact reporting, diversity reporting, and financial disclosure are spurring more organizations to conduct ESG audits.
In an ESG roundtable, Klaas Nijs of Antea Group Belgium shared, “Regulation is broadening in scope: whereas in the past regulators tended to focus on large emitters first and foremost, they are now also shifting focus on smaller companies because in the end, effective climate change regulation needs address all actors.”
Planning for an ESG-aligned Future
Every organization’s ESG journey is unique to its particular industry, the regions it impacts, and its organizational structure.
As your organization prepares for an ESG-aligned future, it’s important to consider where you focus your goals and invest to make the greatest positive impact.
Céline Van Hecke of Antea Group Belgium advises, “It’s clear that reporting on ESG topics and providing climate related information is becoming important to all companies. Not only pressure from stakeholders and investors, but also regulatory requirements are increasing and broadening. The sooner you get started in providing information on how your company impacts the climate, the better. It helps to identify material business risks and opportunities, and a report is an interesting means of both internal and external communication.”
Environmental
Climate change has created a sense of urgency around the globe in terms of corporations taking responsibility for their environmental impact.
Common environmental goals:
- Reduce overall greenhouse gas emissions
- Manage hazardous material waste
- Mitigate harm to local water supplies
- Protect biodiversity and wildlife
Social
From racial equity to public health policy to the war in Ukraine, the impact of social issues on the workplace is more apparent than ever. Workers, community members, and other key stakeholders are asking brands to take a more active role in social issues.
Common social goals:
- Enact fair labor standards
- Actively support diversity and inclusion
- Enable stronger communities through economic development
- Ensure health and safety of workers and community members
Governance
Poor organizational governance can have far-reaching consequences for shareholders and the public. The purpose of a board is to thoughtfully steer the direction of an organization to the benefit of all stakeholders.
Common governance goals:
- Robust data security
- Transparent business ethics
- Ethical supply chain management
- Reasonable incentives programs for C-Suite and shareholders
Make a Real Commitment to ESG
ESG has proven to be a valuable tool for both sustainability efforts and corporate financial performance. For ESG to be successful, organizations need to commit to combating real problems.
Check out our own Inogen Alliance 2021 ESG report here.
“Measure your current ESG footprint—that’s crucial,” Simpson of McKinsey offered. “Then discover the magic: What is the essential strength that you bring, which is understood and felt by your employees and stakeholders and everybody can get excited about? Then make that a strategic differentiating factor.”
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