ESG: Environmental, Social, Governance... What is it? Why should companies care? And how do you begin?
What is ESG? (And what it's not.)
A Google search for Environmental, Social, and Governance (ESG) delivers a page brimming with investing-related results and little else. That’s likely because investors routinely use ESG scores and ratings as a stock-screening tool to attempt to predict a company’s future financial performance and its liability to ESG-related risks (e.g., pollution, gender inequality, data security, fair labor practices, and much more). As nonfinancial yet critical insights, ESG factors influence public perception, which in turn drives—or devastates—stock prices.
But ESG is far more than an investment indicator, despite what Google might lead you to believe. In fact, it’s fast becoming a mission-critical tool and key differentiator for companies from every sector.
ESG factors can impact many things, including whether other companies are willing to partner with yours or even which consumers buy from you.
What’s more, ESG is an opportunity for companies to foster or build their reputations, to tout data points where they already excel, and to not only acknowledge potential shortcomings but also establish benchmarks and processes to mitigate them.
Clearly, Google has steered you wrong. ESG isn’t all about investing.
If you’re reading this article, chances are you’re in the early stages of your ESG journey, and maybe you’ve suddenly been tasked with plotting an ESG course for your company. Luckily much of what companies initially focus on for ESG is pretty similar to what you may already be doing:
- Tracking incidents and hazards
- Improving DEI (Diversity, Equity and Inclusion) in your work environment
- Making sure employees are following business ethics policies
- Better managing your chemical database
- Focusing on employee health and wellbeing
To help you better understand how ESG fully relates to individual companies—and as an extension, the personnel charged with implementing its processes and reporting procedures (e.g., human relations personnel and EHS professionals), let’s take a deep dive into the world of ESG.
Where did ESG come from?
As outlined in a recent Forbes article, ESG first became a thing in 2006 thanks to the United Nation’s Principles for Responsible Investment (PRI) report, where ESG-related issues were first referenced. But since then, ESG has evolved to become both an investing tool, and a brand assessment and reporting strategy.
ESG was originally somewhat relegated to very large brands, often those most public or consumer-facing, such as Ford, DuPont or Pfizer. But in the last five plus years, ESG practices started moving downstream as businesses recognized it’s just as important for their employees and their customers as it is for those of these larger brands. All companies can improve their culture, employee retention, and, yes, business and environmental practices, as a result ESG initiatives.
In its simplest forms, ESG works something like this:
- Internal stakeholders identify ESG-related metrics and values that are important to the organization and the market at large.
- They then select related standards and frameworks, along with a reporting dashboard
- And ultimately establish various internal processes and procedures to regularly assess how their company is performing in relation to these metrics
Over time, the company reports on the metrics, all while it strives to improve some of them and to tout others. Thus helping the brand, employees, investors, and other areas of the business.
So ESG probably sounds all well and good—but also like a lot of work with little payoff, right?
Not exactly. ESG is a major factor driving brand perceptions, which can deliver amazing payoffs for your company.
Why should your company care about ESG?
According to a 2021 GreenBiz article, a company’s intangible assets (reputation, brand value, customer data, patents, etc.), which is influenced by ESG considerations, are a full 90% of the company’s value – much larger and more valuable than tangible assets such as its manufacturing plants, buildings, land, and inventory. These intangibles, then, are exposed to ESG-related risks, which means companies must assess, report on, and take steps to consistently improve environmental, social, and governance factors to maintain as much intangible value as they can.
Chances are, you personally have identified a handful of companies you won’t do business with due to factors that have nothing to do with their products or services. Maybe you won’t eat at a particular sandwich shop because its founder previously hunted exotic animals. Or perhaps you’ve written off a hotel chain thanks to a security breach that leaked millions of guests’ data. Or you no longer use a specific brand of shampoo because of the company’s environmental mishaps.
When your brand is your business (or at least 90 percent of its assets), protecting it is a no-brainer. And since ESG is so closely tied to brand perception, companies can wield it as a tool to reap brand-related benefits—and to sidestep potentially devastating potholes. Here are some related ESG advantages.
ESG principals impact consumer perceptions and partnership decisions.
Consumers and corporations make decisions every day on who to do business with, and these decisions are often based on factors related to ESG principals. So when a company sets up ESG criteria and takes steps to benchmark and improve its scores, it may also be able to address and eliminate negative issues before they develop into permanent, brand-altering problems.
What’s more, ESG offers the opportunity to score an advantage over the competition. Especially if your company is doing well in a particular aspect of ESG, promoting your success can leapfrog you ahead of the competition.
Reporting positive ESG stats and/or improvements can provide access to new markets and buyers.
Just as negative blowback can put off consumers and partners, positive ESG reports and incremental improvements can expose your company to previously untapped relationships and markets.
Take the Millennial and Gen Z markets. According to data from Statista, members of Generation Z and Millennials account for 20.67 and 21.75 percent, respectively, of the U.S. population in 2021. That’s a whopping 42.42 percent total.
Relatively young audiences such as Millennials prefer brands that align with their social issues. In fact, 83 percent of this audience say it’s important that companies they buy from align with their values. Similarly, members of various demographics, ethnic groups, and the LGBTQ+ community, along with those who actively support these members, may be won over—or outraged—by ESG factors.
Employee retention and other employee engagement can lead to cost reductions.
Positive ESG factors could lead to reduced employee attrition and therefore lower employee retention and recruitment fees. According to a recent ESG performance survey, 49 percent of respondents ranked employee satisfaction as a key area of interest for ESG implementation, with only customer satisfaction (54 percent) and brand and reputation (78 percent) ranking higher.
Going further, 3M reportedly saved $2.2 billion after it introduced its “pollution prevention pays” program, which helps to prevent pollution by redesigning equipment, recycling/reusing production waste, reformulating products, optimizing manufacturing processes, etc.
Certainly, a company can’t just whip up an ESG report and call it a day. To garner the aforementioned benefits, stakeholders need to gather insights, set up processes and analysis, and then actually take action. Next, let’s dig into some how-to insights.
What are some ESG categories and metrics?
What should you include in your ESG reports? What frameworks should you use? And what general topic and specific metrics should you consider?
The World Economic Forum offers a widely accepted set of 21 core and 34 expanded metrics and disclosures, all of which fall under four ESG-related headings: people, planet, prosperity, and governance. However, companies can employ various— and multiple—frameworks and standards. MovingWorlds offers a short list of reporting frameworks as reference.
To help you conceptualize what falls under each heading, here’s a brief list of topic categories and specific metrics you might include in your ESG reporting.
Overall: How well is the company consuming/conserving energy, controlling environmental impacts, and taking care of the planet?
Overall: How does the company treat people and various demographics, and how does it impact the community?
Overall: How is the company controlled, directed, and managed, and what processes are in place to ensure leaders are held accountable?
How do you get started with ESG?
So, how do you get your hands around this beast? While every company’s goals and challenges are unique, the most important part is getting started with something. Here are some general guidelines to get you started. These are broad as it really depends on what metrics you are looking to improve on.
- Gather your existing data: You are likely already collecting data on many items that are related to ESG. They may be on paper or in spreadsheets, but that data is a good starting point. Get it into a proper ESG/EHS system that you can use going forward.
- Research your options. It helps to first get a handle on the potential frameworks you might use and metrics you might want to track.
- Assess brands and competitors. Check out ESG reports for top brands as well as the competition. What are they reporting on? What frameworks do they use? How might you want to mirror or deviate from their efforts?
- Identify stakeholders. Once you’ve developed a general idea of where you’re headed, identify which internal stakeholders you’ll need to make top-level decisions and provide the ongoing data necessary to report on your selected metrics.
- Select tech tools. You’re going to need a way to efficiently collect, organize, and report on ESG factors. Some companies may have internal solutions at the ready. Others will need to move from paper, pencil, and spreadsheets to a more robust EHS Platform. Businesses simply can’t get the insight they need without a flexible platform that integrates with other systems dynamically.
- Phase your rollout: You need to communicate your initial goals with your employees to get them on board. They are critical in that they’ll be part of the data (training, HR info), and will also be your data gatherers. Don’t overwhelm them with too much at once – start by initiating three new processes in the first three-six months. Then introduce more as you can.
Remember, all of this will take time. Reporting on and improving ESG metrics as part of your company’s overall goals is a long-term effort. Getting started with something, now, sets your company and employees on their way.
Clearly, ESG isn’t just for investors, and in fact, it’s a critical tool with multiple advantages—not to mention nuances. But this primer should give you the basic information you need to take the next steps toward making ESG a reality—and an advantage—for your company and workers.