ESG (Environmental Social Governance) is an approach to conducting business that incorporates several non-financial metrics in three key areas: environmental, social, and governance. With demand for transparent and sustainable business practices at an all-time high, companies must have an ESG strategy in place to meet investor, customer, employee and regulator expectations.
In this ESG program guide, we break down the basics of ESG as well as its importance. We'll provide guidelines and examples of ESG strategic roadmaps along with steps to formally start your own ESG program.
Table of Contents
- What Is ESG?
- Why Is ESG Important?
- ESG vs CSR
- ESG Factors
- How ESG Works [INFOGRAPHIC]
- What Is an ESG Strategy?
- Why Companies Need an ESG Strategy
- What is an ESG Program?
- 9 Steps to Build an ESG Program [INFOGRAPHIC]
What Is ESG?
ESG is a holistic approach to business that goes beyond maximizing shareholder profits to address environmental, social, and corporate governance impact for all stakeholders.
Through ESG, businesses define and measure their impact on the environment and society while remaining transparent about their governing practices. The goal is to ensure businesses remain intentional about fostering sustainable and ethical operations for people and the planet.
Why Is ESG Important?
ESG is important for companies, employees, investors, and consumers.
✔ ESG is important for companies because investors, customers, community members and regulators are demanding it. Investors are increasingly attuned to the long-term risk to growth posed by companies that overlook issues such as climate change. Customers are looking for companies to purchase from that prioritize ethical and sustainable practices. Community members seek assurance that companies are taking local sustainable development concerns into account. Under pressure from all three other stakeholder groups, regulators are putting requirements in place for business to report on metrics that are consistent, comparable and reliable.
✔ ESG is important for employees because they wish to work for companies that share their values and place importance on ESG principles. Employees want to be a part of companies dedicated to serving a greater purpose. This leads to fulfillment within their careers, something all employees wish to experience.
✔ ESG is important for investors because companies that overlook ESG-specific issues such as social inequality and climate-related impacts pose a greater long-term risk. In contrast, companies focused on ESG are better positioned for long-term growth.
The benefits of ESG go even further. For example, companies that invest their time and effort into ESG may experience:
- Bolstered competitive advantages when reacting to economic, social, environmental and regulatory changes
- Reduced risk from threats such as climate change and vulnerabilities in the supply chain
- Expanded collaboration opportunities and business partnerships
- Increased innovation when considering new processes, products and services through an ESG lens
- Improved financial performance
- Enhanced customer loyalty, investor trust and fully engaged employees
ESG vs CSR
The terms ESG and CSR (Corporate Social Responsibility) are often used interchangeably. Some believe CSR was the first form of ESG. While both ESG and CSR help companies conduct ethical and sustainable business practices, the approach is different.
CSR refers to the methods companies use to prioritize environmental and social concerns. In contrast, ESG clearly defines those methods and measures the impact of environmental, social and governance efforts within the company and on the communities in which it operates. ESG includes specific criteria businesses must meet.
Through CSR, a business may aim to hire a more diverse workforce. For businesses with an ESG strategy, however, that goal becomes a measurable metric in a set timeframe. For example, the ESG company might seek to hire 10% more women by the end of the fiscal year.
ESG & Sustainability
ESG and sustainability focus broadly on the economy, people and the environment. ESG includes measurable and specific indicators that address all aspects of the environment, society and business governance.
Sustainability is sometimes confused with a narrow environmental nexus; however, it refers to a company’s holistic efforts to balance people, planet and profit. Sustainability was defined by the United Nations (UN) Brundtland Report, published in 1987, as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” This approach is the basis of the UN Global Sustainable Development Goals (SDG) – one of the broadly accepted ESG frameworksused to align business strategy with solutions to key environmental and social issues.
ESG Factors
What Are ESG Factors?
ESG is composed of three factors -- Environmental, Social, and Governance. (Note: Beware of differing semantics -- the term “factors” is often used interchangeably with “criteria,” “issues” and “risks” amongst different ESG frameworks, rating agencies, or references.)
ESG Environmental Factors
The ESG environmental factors focus on how a company impacts natural resources and manages environmental risks.
ESG Social Factors
The ESG social factors focus on stakeholder relationships -- including relationships with employees, customers and society as a whole.
ESG Governance Factors
The ESG governance factors focus on how a business is governed, including how decisions are made, who makes decisions regarding the business and how processes are completed.
