Major corporations and economists worldwide recognize the importance of business sustainability, which should be committed to both the environment and society. In this context, the set of ESG practices (Environmental, Social, and Governance) gains increasing prominence in the business world.
In this article, we will explore the intricacies of this concept and how to implement it in your business. Enjoy your reading!
As we already mentioned, the acronym ESG stands for Environmental, Social, and corporate Governance sustainability in companies. The aim of this commitment goes beyond merely averting the depletion of natural resources; it also addresses the absence of corporate practices focused on social guidelines and the lack of integral management.
ESG is more than a compensation policy; it is a solid strategy that should be planned and integrated into every facet of a company’s operations. Therefore, comprehending the significance of ESG for your company is fundamental to its development.
ESG has become a pivotal concept for many companies as it seeks to balance short term financial interests with broader concerns related to the environment, society, and business ethics.
Moreover, numerous institutional investors, investment funds, and shareholders are increasingly considering ESG metrics when making investment decisions. Companies that adopt robust ESG practices may access capital from investors seeking to align their portfolios with sustainable values.
Furthermore, strong ESG practices can enhance a company’s reputation and ensure that it keeps a “social license to operate.” This is crucial for maintaining public trust, avoiding controversies and boycotts.
To grasp the meaning of ESG, it is important to understand its origins. The acronym ESG first appeared in a 2004 report by the United Nations titled “Who Cares Wins.” With 20 financial institutions from nine countries, the document aimed to establish guidelines that encompassed environmental, social, and governance issues for the financial market.
Additionally, the report pointed out that companies caring about these three values could not only benefit society but also add value to their businesses since these principles are increasingly essential to modern investors.
Despite its inception in the investment market, the ESG concept has gained prominence in other sectors of the economy over the years. In 2015, it gained even more strength with the UN’s 2030 Agenda and the Paris Agreement, both focused on the Sustainable Development Goals (SDGs).
1. Poverty eradication.
2. Zero hunger and sustainable agriculture.
3. Health and well-being.
4. Quality education.
5. Gender equality.
6. Clean water and sanitation.
7. Affordable and clean energy.
8. Decent work and economic growth.
9. Industry, innovation, and infrastructure.
10. Reduced inequality.
11. Sustainable cities and communities.
12. Responsible consumption and production.
13. Climate action.
14. Life below water.
15. Life on land.
16. Peace, justice, and effective institutions.
17. Partnerships for the goals.
Later, in August 2019, the Business Roundtable, a group comprising leaders of major U.S. companies, released a letter breaking away from the notion that businesses exist solely to provide returns to shareholders. With all these developments, ESG became a global pact.
In 2020, amidst the Covid-19 pandemic, the need for a conscious development agenda became even more apparent. To emphasize this context, the World Economic Forum launched a metrics guide based on ESG values at the 2020 Annual Meeting in Davos, a practice further reinforced at the January 2021 gathering.
The goal is for 57% of mutual fund assets in Europe to align with ESG criteria by 2025.
Discussions about climate change are not just knocking on the door; they have already entered and become a part of our daily lives, especially for large companies. Researchers have noticed that global warming has been increasing by 1.5°C annually due to carbon emissions.
As a result, the United Nations has entered into agreements with major companies to reduce carbon emissions by 45% by 2030 and reach zero emissions by 2050.
Consequently, it has become increasingly common to see new regulations and investments aimed at promoting a more sustainable agenda within organizations, including areas such as water resources, biodiversity, waste management, and more.
These are a company’s actions related to the environment, including behaviors associated with the consumption of natural resources, carbon emissions, and other pollutants, global warming, energy efficiency, waste management, air and water pollution, etc.
It might seem distant for companies not directly involved in emitting pollutants, but by ignoring important aspects like recycling or the proper disposal of environmentally harmful waste, such as electronic devices, your company is falling short in this pillar.
This pillar considers how the organization deals with social factors such as inclusion and diversity, labor relations with employees, customers and suppliers, respect for human rights and labor laws, community relations, among others.
This aspect of ESG has become increasingly important both in society and within organizations. More and more, investors are supporting companies that prioritize the wellbeing, both mental and physical, of their employees.
Thus, having tools and methodologies capable of generating a more connected talent management is necessary and crucial for businesses of all sizes.
This ESG pillar assesses the administrative and management spheres of the company, considering the independence and diversity of the board, the compensation policy for top positions, transparency, and the institution’s ethics.
Furthermore, is also responsible for working on data protection and privacy of employee information, ensuring maximum security and integrity.
In this way, this pillar seeks to serve different areas of the company (employees, shareholders, and customers); ensuring best practices so that none of the parties is harmed.
To have well-consolidated corporate governance, it is crucial to have a platform that integrates all the company’s information and KPIs.
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The pandemic has laid bare what many of us already suspected: we need to rethink how we interact with the world around us. Our natural resources are limited, people are what drive the system’s gears, and good values endure.
With this in mind, the ever evolving landscape of consumer relations takes another turn. Modern citizens are more concerned than ever about the planet’s impacts, the use of natural resources, gender equality, inclusion, diversity, and many other issues.
Disregarding ESG standards has a negative impact on businesses, leading to dissatisfaction among customers, partners, and employees who increasingly expect and demand a commitment to these values from companies.
Therefore, it is essential to understand the importance of ESG practices and each pillar that supports it to create more value for businesses.
A Deloitte survey showed that 75% of global investors have incorporated ESG indicators into at least a quarter of their total investments. The list is growing, and they are aware that all these issues influence a company’s assessment and its market value.
Read also: Key performance indicator (KPI) examples and how to use each one
Retail consumers seem to agree as well. According to the Center for Sustainable Business at New York University, consumer preference leans toward more sustainable products across all categories.
In other words, when choosing a product like chocolate, for example, the modern consumer looks beyond just taste. They consider the entire process of chocolate manufacturing, from cocoa farming and the producer’s quality of life to the environmental impact of production and whether there is any child or slave labor involved.
Employees also want their companies to make socially responsible decisions in the short and long term. Additionally, satisfied employees are twice as likely to stay with a company for at least five years compared to those who work solely for the payment.
Employee loyalty is a significant benefit for companies, as it reduces hiring costs, keeps employees aligned with business strategies, and strengthens institutional memory.
In essence, ESG fundamentally changes how companies interact with customers, employees, suppliers, communities, and local governments. It is a two-way street in which all involved parties benefit.
So far, we have seen that adopting ESG practices in your business is essential. However, it is not a simple task to incorporate them into the company’s daily operations. To help you get started on this journey, here are some tips we have gathered for you.
The first step is to establish a solid strategy to put into action. Like any management methodology, ESG involves a process of continuous improvement.
To develop a sound ESG plan, you can use tools such as PDCA, 5W2H, or SWOT analysis to outline the strategies and how they will be implemented.
Here are some best ESG practices based on its three pillars:
Greenwashing occurs when a company claims to adopt sustainable policies but, in reality, does not. It involves a disconnection between words and actions, which goes against ESG principles. Transparency in management and demonstrating the company’s actions in this context are key components of ESG.
In addition to questioning environmental impacts and the possibility of a boycott campaign against the company, consumers are protected by the Consumer Protection Code, which considers such practices as deceptive advertising.
There is a wide variety of reporting structures, standards, and guidelines to evaluate your company’s actions and impacts related to ESG metrics. In other words, there is no one-size-fits-all approach for all types of businesses. Your data planning and structuring should be tailored to your organization’s needs.
Implementing ESG practices in your business is not a one-time task. It requires ongoing effort to keep business activities aligned with these principles.
Therefore, you need to keep the agenda active, with constant analysis and action improvements to achieve excellence in this management model.
Sustainability in the ESG pillars should not be separate from your business strategy; in fact, it should be your business strategy. It is crucial that all future steps of the company are planned based on this scenario.
Last but not least, create an internal specialized team to discuss, plan, execute, and analyze all ESG processes within your company.
Transitioning to a more sustainable management model is challenging but incredibly rewarding for companies that choose to adopt it. A sustainable future is the only possible future for businesses.
Start implementing ESG practices as soon as possible. There is no turning back to the old business model. Begin planting good actions to reap their positive results.
STRATWs One is a corporate performance management software trusted by over a thousand companies. Now that you know what is ESG and how can boost your organization’s results, check out how STRATWs One can help you implement ESG practices into your business:
With STRATWs One, you have a comprehensive tool to support your ESG initiatives and drive sustainable business performance.
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