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ESG 101

esg 101

The term “ESG” refers to a company’s overall social and environmental impact as well as how strong and open its governance is in terms of management, executive compensation, audits, internal controls, and shareholder rights. It assesses your company’s operational integration of environmental, social, and governance standards as well as your business model, its impact, and its sustainability.

Its importance has strengthened in recent years as a result of the attention the fast-shifting business environment of today has placed on ESG and its capacity to achieve sustained competitive success. It offers the potential to expand your business while enhancing the environment and community, since two-thirds of investors, according to CBI, consider ESG considerations when investing in a firm.

By adhering to ESG standards, your business is a responsible steward of:

  • Environment: focuses on how a business minimizes its impact on the environment. Corporate climate policy, energy use, waste disposal, pollution control, preservation of natural resources, and treatment of animals are a few examples. The criteria can also be used to assess any potential environmental concerns that a business may face and how it is addressing those risks.
  • Social: focuses on how an organisation affects both workplace culture and the wider society. For instance, ensuring that goods are safe and that consumer information is protected, stopping abuses in the supply chain including those involving labour rights, and fostering equality at work with diversity and inclusion policies.
  • Governance: refers to the processes of making decisions, reporting, and organising the operations of a company. It also relates to the company’s moral conduct and its openness to stakeholders regarding its operations. Examples include being transparent about executive compensation, ensuring diversity in any leadership team and providing accurate reporting to stakeholders on financial performance, corporate strategy, and operations.

For many, however, ESG extends beyond the three-letter acronym to take into account how a company treats all of its stakeholders, including the environment, workers, communities, consumers, and shareholders.

Why Is ESG Growth Accelerating?

esg floodingAs companies face rising complexity on a global scale, investors are rethinking conventional investing strategies. As a result of global sustainability challenges like the risk of flooding and rising sea levels, privacy and data security, demographic changes, and regulatory pressures, investors are exposed to new or heightened risks. The economic pressure placed on industries by COVID-19 has affected companies’ exposure to ESG risks and their ability to manage them. As such, companies will be subject to more scrutiny if they are not effectively managing their ESG or climate risk.

A new generation of millennial investors around the world has already helped drive the rapid growth in ESG investment. According to a 2018 survey by Bank of America Merrill Lynch, over the next 20 years, ESG funds alone are expected to expand US assets by a “conservative estimate” of USD 20 trillion.

Advanced technology has also contributed to helping deliver dynamic content and ESG insights that are financially relevant. Machine learning and natural language processing have increased the speed and accuracy of data collecting.

Five Ways ESG Creates Value

With over $30 trillion expected to be invested into ESG companies by 2025, the potential for ESG to expand your business’ value is too great to leave unexplored. This list of advantages is a way to think of the term systemically. Some will be more prevalent in specific regions, while some are more likely to occur in specific industries or sectors.

  1. Unlock Competitive Advantage

Companies are better able to spot strategic opportunities and overcome competitive problems when they understand the value of adapting to changing socio-economic and environmental conditions. A company’s competitive moat compared to other players in the industry can be widened through proactive and integrated ESG practices. For example, Starbucks tapped into the Chinese market by offering healthcare to employees’ parents. Now, they have 2,000 stores in one of the fastest-growing markets on the globe.

  1. Boost Top-line Growth

esg growthA compelling ESG proposition enables companies to tap into new markets and grow within existing ones. Governmental bodies are more willing to grant corporate actors the access, approvals, and licences that open up new growth opportunities when they have trust in them. Studies have also shown that it can influence consumer preference, with consumers increasing their willingness to pay to “go green” by up to 5%.

  1. Lower Costs

It has been proven that ESG reduces costs. Among other benefits, implementing ESG successfully can combat rising operating costs (such as raw material costs and the true cost of water or carbon), which, according to a McKinsey study, can have a 60% negative impact on operating profitability.

  1. Attract and Retain Top Talent

Companies with a strong ESG proposal can attract and retain top talent, improve employee engagement by fostering a mission-led goal and boost overall productivity. Similar to how a sense of greater purpose can motivate employees to perform better, a weaker ESG proposition can reduce productivity. Strikes, worker slowdowns, and other labour actions within your company are the most obvious examples.

  1. Optimize Investments and Assets

Last but not least, a solid ESG programme can increase investment returns by directing money to opportunities that are more promising and sustainable (for example, renewables or waste reduction companies). Several firms may find themselves needing to catch up as a result of the changing rules of the game, which include governmental responses to emissions that affect energy costs and bans or restrictions on things like single-use plastics or diesel-fuelled cars in city centres. One way to get ahead of the future curve is to consider repurposing assets right now.

The Role of Software In Accelerating ESG Adoption

The data challenges and increased scrutiny against greenwashing pose a need for robust ESG reporting. Although this may seem daunting, there is a range of solutions available to make sense of your various initiatives.

An ESG data management solution can help coordinate the moving parts, report on progress and stay ahead of activists, investors and competitors. With ESG anticipated to become more significant among customers, legislators, regulatory authorities, and investors, you need to get ahead of the game when it comes to ESG data collecting, benchmarking and reporting. As ESG reporting becomes the standard, you must have documentation and reports that can withstand auditing. Additionally, the solution you select must be adaptable and scalable to keep up with shifting ESG priorities and external drivers.

Takeaway

With ESG moving from a ‘nice-to-have’ to an imperative, the ultimate value of ESG criteria will depend on whether it encourages companies to drive real change for the common good, or merely check boxes and publish reports. That, in turn, will depend on whether the investment that flows will follow the criteria that are realistic, measurable, and actionable.

Here at Storm4, we partner with many ESG software companies striving to drive change for the common good to support them in their scaling needs. If this sounds like a challenge you are experiencing in your ESG start-up, get in touch with our team today!