Will you invest in a company that does not make any effort to minimise at least some adverse impact on the environment caused by a multitude of factors? Will you trust a company that doesn’t worry about the health of workers, gender equity or equitable pay policies?
If you replied “no” to all of the above, it’s not shocking. Many people will make the same statement. In past years, more focus has been paid to environmental and human rights concerns, contributing to a dramatic shift in the stock market. Companies are asked to take responsibility for the impact their business activities have on the environment and to keep the damage to the minimum, to the extent the customers judge companies not only on the basis of financial results, but also on the basis of non-financial considerations and how the company itself handles the associated challenges and opportunities.
Environmental, social and governance (ESG) problems are not just ethical issues-they have a direct effect on sales. That is why any company must, without delay, open a discussion on sustainability.
Socially accountable expenditure is not a novel phenomenon. In reality, it goes back to the 1960s, as investors started to choose the stocks they were investing in more carefully; their preferences focused on motivations that were not solely tied to economic metrics-for example, reluctance to invest in businesses embroiled in the apartheid system in South Africa.
The initial modern benchmark was set in early 2005 by UN Secretary-General Kofi Annan, who introduced the Principle for Prudent Investments (PRI) collaborating with the world’s biggest institutional investors and market sector and democratic society specialists. This effort was motivated by the realisation that it was no longer possible to assess the success of investment accounts by taking into account conventional financial considerations alone; so-called ESG (Environmental , Social and Governance) factors could now be included in the assessment process, as non-financial concerns such as climate change and human rights could have a significant effect on performance.
What is ESG?
ESG stands for Environment, Social and Governance: these will be the three core fields that form the cornerstones of achieving sustainability.
Companies are assessed by investors, as discussed in the earlier section, using ESG parameters to measure the nature of the investment and decide the risks involved. Further in detail:
Environmental considerations apply to the actions of the organisation related to environmental concerns, such as loss of land, climate change, waste production.
- External considerations, involving health and safety concerns, are linked to the organization’s concern for people, employees and local populations.
- Corporate policy and regulation, involving tax strategy, inequality, compensation etc, alludes to governance considerations.
More companies are understanding the importance of ESG and employing ESG consulting services to ensure they are compliant.
Why ESG matters for your business
Over 170 new international regulatory proposals were proposed in 2018 (+160 per cent vs. 2017), of which 80 per cent were aimed at investment firms.
The European Commission has reiterated the value of sustainable development in March 2019, with the implementation of new guidelines on transparency standards relating to sustainable investing and threats to stability.
It is apparent that social awareness is a hot subject in the investor world and something you would discuss within your organisation, regardless of the legal specifications. Although most investors are implementing ESG variables into the investing process, it is a given that incorporating a sustainability approach will definitely impact sales positively.
This involves a change in mindset: instead of an expense, ESG must be viewed as an investment. In his 2019 message to CEOs, Larry Fink from BlackRock says, “Income is in no way conflicting with purpose-in fact, profit margins and purpose are inseparably related.”
Indeed, businesses that have integrated ESG considerations into their strategies have achieved a range of advantages, including improved investor confidence and shareholder value.
Companies need to build a sustainability knowledge plan that fully recognises the issues and problems open to them and leverage this awareness to accelerate strategies and monitor KPIs that matter.