What is ESG and why does it matter?

What is ESG, and why does it matter? A clear explanation for business leaders looking to enhance their careers with dedicated training.

Environmental, social, and governance (ESG) factors are now key for many businesses; they’re not just about responsible practice but a framework for evaluating sustainability and ethical impact, influencing long-term success and reputation.

ESG is a tool allowing investors to track a company’s environmental and societal impact. It includes non-financial factors not in traditional reporting, giving a holistic view of sustainability efforts. Investors increasingly use its criteria to screen potential investments, as strong performance can cut risk and boost long-term value.

ESG covers environmental, social, and governance factors, interconnected and considered holistically in business strategies.

Environmental Factors assess a company’s impact on the planet, including its carbon footprint, energy efficiency, and waste management. Companies with strong environmental performance prioritise sustainability, renewable resources, and conservation. Specific factors include energy consumption, waste reduction, climate change mitigation, supply chain impact, and product sustainability. In the US, potential returns around ESG as less certain because of conflicting political agendas, although research suggests companies with firm profiles may have better financial performance.

Social Factors consider a company’s interactions with stakeholders, including employees and communities. These include labour practices, human rights, diversity and inclusion, and community engagement. Social factors are also linked to the UN Sustainable Development Goals (SDGs). Specific factors include labour standards, diversity, human rights, supply chain impact, and support for local communities. 

Governance Factors: This refers to the systems and processes governing a company’s operations, including board diversity, executive pay, and transparency. Strong governance promotes accountability, integrity, and sound business ethics. Specific factors include executive compensation, shareholder rights, transparency, audit and risk management, compliance, and data privacy.

ESG ratings and scoring systems are key to evaluating a company’s performance, offering a standardised way for stakeholders to assess sustainability practices. However, there is no single, universally accepted system. Providers like MSCI, Sustainalytics, and Bloomberg use different methodologies, leading to inconsistencies. Some agencies use company surveys; others use public disclosures or both. To cut risk, investors often use multiple platforms and do their own research to avoid “greenwashing.”

ESG investing has moved from a niche concept to a mainstream consideration. It stems from socially responsible investing (SRI) in the 1960s, when investors excluded stocks based on activities like tobacco. SRI expanded to cover labour standards, human rights, and environmental protection. The term “ESG” emerged in the mid-2000s from the United Nations Environment Programme, emphasising the links between environmental stewardship, social responsibility, and corporate governance.

If you’ve watched the news, you’ll know that ESG is at a crossroads:

• The movement remains popular financially, with trillions of dollars of related assets in existence globally. 
• There are more regulations than ever before in places like the EU, which sees the movement as a vital component of its green, sustainable ambitions. 
• However, companies often complain about new rules introducing too much red tape.
• The movement has attracted considerable criticism in the United States, where the Trump Administration declaring open war against it. 

All the above leaves corporate leaders in limbo about the movement’s ultimate future. Will it continue? Will it be reborn with a different name and principles? Will it die? We can’t be sure at this point. But until then, it’s a concept your board should always pay attention to.

ESG allows businesses to create value, cut risks, and boost their reputation:

Risk management: ESG risk management involves identifying, evaluating, and tackling environmental, social, and governance risks. The Chief Sustainability Officer (CSO) role is also becoming more common, highlighting its importance in leadership. Companies also need to integrate it into business continuity planning, assessing and mitigating risks like data breaches and extreme weather events. 

Opportunity identification: A proactive approach to ESG challenges allows companies to improve and innovate, which attracts investors, cuts capital costs, and improves their reputation. ESG can drive innovation, efficiency, and long-term sustainability. It should be a strategic initiative integral to how a company creates, delivers, and captures value.

Stakeholder engagement: Engaging stakeholders is crucial for ESG performance. It ensures that the interests of all parties are considered, which builds trust and generates long-term value. To engage stakeholders effectively, companies need to understand their interests and involve them in planning and implementing programmes.

Dedicated qualifications ensure that, as a corporate leader, you can tackle the main issues head-on and stand out amongst colleagues with valuable insights. 

Check out this ESG course for more details.

ESG has become a mainstream consideration for investors, consumers, and regulators. Companies that embrace ESG principles are not just committed to sustainability but are positioning themselves for long-term success. Investors are incorporating ESG into decisions, and companies need to integrate it proactively, as it can drive innovation and create value. Transparency and accountability are essential.

By understanding its components, staying abreast of trends, and integrating it into operations, business leaders can create value, cut risks, and build a more sustainable future.