Since the 2006 United Nation’s Principles for Responsible Investment (PRI) report, ESG criteria – Environmental, Social, and Governance – have been an essential component in the financial evaluation of companies. In the time that has passed since then, ESG has become an increasingly significant factor for major investors, who expect to see effective strategy, tactical implementation and tangible results in all three fields.
Why are ESG ratings so important to modern businesses? Beyond putting an enterprise on the right side of history in terms of best ethical and environmental practice, adherence to solid ESG strategies also bring a positive impact on the bottom line of many businesses. A Business Wire survey found that 68% of respondents saw the implementation of ESG criteria aiding improved returns. Meanwhile, 77% of respondents claimed they invested in ESG because of its impact on a public company’s financial performance.
In this article, we’ll explore the ESG acronym in detail – digging into what each separate element means, and how they variously apply to businesses.
What Are ESG Environmental Factors?
The E in ESG stands for Environmental criteria – the considerations that a business is taking to mitigate its environmental impact and keep improvements continuous here. This might include reviewing factors such as energy usage (both in production and operational circumstances), waste (again, both through more efficient production processes and daily operations), pollution (paying careful attention to the measurement of emissions) and natural resource conservation. Where relevant, Environmental factors can also include the ethical treatment of animals.
The Environmental component of ESG acts to help measure any environmental risks a company might face and considers how effectively the company is managing those identified risks. This kind of insight is becoming increasingly important – not only as public interest increases but as Governmental criteria evolve (for example, new carbon targets in the wake of events such as COP26.)
As you’d expect, public scrutiny here is high. With greenwashing such a prominent issue, the onus here is on businesses to be taking careful, calculated measures to correctly and transparently measure their impact and the results of their efforts to improve.
Positive ESG actions that a business can take to assist with Environmental factors include:
Putting out carbon or sustainability reports
Detail is the key to success here. Reports should, of course, be highly accurate, but also easily to discover and access. For true transparency, making these reports publicly available, not kept for the eyes of investors only, shows true commitment to improvements.
It's worth considering your reporting process – optimising this for ease and convenience will help to ensure you can keep producing reports on a frequent basis. KindLink’s dedicated ESG platform enables you to quickly pull together the data you need, producing clear and accurate reports that can track and display any form of impact data, from carbon emissions to rainwater harvesting.
Limiting use of harmful pollutants and chemicals
Manufacturing processes are constantly evolving as new technologies become available and we learn more about the sustainability of the substances we leverage. By keeping on top of the latest scientific advances and guidance, businesses can mitigate the risk of association with harmful chemicals and other pollutants.
This should be applied to all levels of the associated supply chain – for true best practice, it's important that businesses are proactively cognisant of every step leading to production and subsequent usage.
Lower greenhouse gas emissions
A critical factor in the face of the climate crisis – the spotlight, understandably, shines very specifically on corporate carbon emissions. While offsetting via the purchase of carbon credits has been popular for several years now, these schemes are not “created equal,” with the effectiveness of many being challenged, and some criticising the act of offsetting altogether.
At COP26, Indigenous Environmental Network executive director Tom Goldtooth referred to the practice as “part of a system that privatises the air that we breathe… It allows polluters to buy and sell permits to pollute instead of cutting emissions at the source.” In the face of this valid challenge, the act of proactively reducing carbon emissions, instead of relying on net totals, is increasingly important.
Using renewable energy sources
Finally, using renewable sources of energy for all aspects of your business – from cloud-based digital strategies that are hosted with carbon-neutral providers such as Google (selected server centres), to heating and lighting your office and warehousing spaces with clean, green energy.
As more teams start to work remotely in the wake of the pandemic, some businesses, such as Shopify, have ensured that their employees’ home supply of energy is also provided from renewable sources.
Considering Post Production Impact
Mitigating the environmental impact of a business doesn’t begin and end with the manufacturing or operational stages. Companies should also be assessing the way that their products can positively influence consumer behaviour and the way that they can be safely disposed of (for example, can they be recycled, or even better, reused?)
What Are ESG Social Factors?
The S in ESG stands for Social criteria. These examine the company’s professional relationships – with employees, suppliers, stakeholders and the wider community – to investigate how well they tally with the company’s professed values. Some factors that go towards informing an ESG score might include all partners within the company’s supply chain holding values that are in line with the company itself, or regular donations, profit sharing and hours volunteered in the community. The care of employees is also taken into account, via respectful and safe working conditions that take employees' health, safety and welfare into consideration.
One of the most critical factors when it comes to achieving good Social ESG is communication. This flows both ways –businesses need to have a clear way of communicating their intentions and offers internally and externally. From listening to the needs and concerns of their employees, through to responding to the good causes that have been positively impacted by their assistance, the businesses that are able to achieve the most Social impact are those which are truly open and collaborative.
KindLink helps ease this communication, by empowering and engaging employees on social matters (giving them autonomy and the tools they need to make a difference on an individual level) and connecting businesses on a deeper level to the local community they operate within (for example, via volunteering opportunities, skill shares and product donations) and by building strong relationships with non-profit organisations.
When it comes to the ESG evaluation of a business, Social factors are becoming increasingly prominent. Aspects such as recovery from the pandemic, and promoting diversity, inclusion, fair taxation and workers’ rights are all increasingly. At a Governmental level, we’re also seeing policy-driven changes occurring For example, in the UK, following the Procurement Policy Note 06/20, central government contracts are now awarded based on evaluation of contractors’ impact via the Social Value Model – which has lead to a huge leap in interest here, as social impact becomes even more tangibly advantageous to the tender and bidding process.
What Are ESG Governance Factors?
The G in ESG stands for Governance – the manner in which a business operates, organises and conducts itself. Governance factors might include the care and transparency with which a company ensures its accounting methods are accurate and ethical. Ensuring that stockholders are able to vote on important issues, and that conflicts of interest have been actively avoided when selecting board members would also be Governance factors. Beyond the internal operation of a business, best practice Governance would also seek to ensure that no political strings were being pulled (for example, through party-specific contributions) to obtain preferential treatment. It goes without saying that general legality of a business’ operation would also fall under Governance – this means that issue-specific policies should be in place to cover matters such as anti-bribery and anti-slavery measures. Increasingly, clients will be actively requesting evidence of these policies before agreeing to professional collaboration.
The key to success when it comes to Governance is transparency. While this has always been, to a certain extent, important within business, in today’s hyper-connected and commutative world, it’s a critical factor. Thankfully, with the dawn of digital transformation, the process of keeping matters transparent and accessible has become easier. ESG platforms such as KindLink make it simple for businesses of all sizes to demonstrate transparency through clearer ESG reporting, and direct communication of the organisations and causes that they are donating to. Collaboration with donors can be publicly demonstrated, making sure that all relationships are above board and clearly communicated.
As with the other elements of ESG, Governance comprises risks and opportunities. In years gone by, for many businesses, good Governance simply meant mitigation of any potential problems that might be encountered, from accusations of corruption, to impartial board members. Within modern ESG however, Governance increasingly represents the chance to actively boost public confidence in a business, as well as improve investor confidence. Businesses can go “above and beyond” – showing that they’re proactively committed to building a company rests on the firmest of ethical foundations
The Future Evolution Of ESG
As a measure of stability and likely future success, ESG is now firmly established within the business landscape. Investors view ESG as a prediction of performance and the public are increasingly interested and aware of the factors that contribute to a solid ESG rating.
Currently, focus appears to be particularly strong on Environmental and Social elements – and these are perhaps the easiest factors to outwardly demonstrate through actions, collaborations and publicised policies. In terms of governmental regulation, we can certainly expect to see more focus on Environmental factors in the years to come, especially as carbon target deadlines creep closer, and practices such as carbon labelling become more commonplace.
Whatever change the future brings for ESG, in order to be prepared for its inevitable evolution, businesses will need to ensure they have internal systems that are up to the task of tracking, reporting, setting and adhering to goals. However your ESG strategy evolves, it will be essential to have a manageable, scalable way of communicating your intentions, efforts and results. KindLink’s dedicated ESG platform offers a complete digital transformation of your ESG practices – enabling better transparency and accountability along the way.
With ESG playing such a crucial role when it comes to securing future investments, working with a dependable ESG platform offers a solid ROI – with instant, intuitive access to reporting, and the ability to demonstrate a tangible internal commitment to ESG.
ESG is an integral aspect of future success for businesses, and KindLink’s dedicated digital ESG platform offers everything you need to keep your strategy effective, manageable and clearly communicated.