Among the many things that the COVID-19 pandemic has fuelled, conscious consumerism is one of the biggest, and a large number of companies have responded by announcing net-zero or carbon-neutral commitments by pledging to reduce greenhouse gas emissions and investing in climate action.
In such a scenario, Impossible Foods[1], a company that makes meat, dairy and fish without using animals, has raised over USD 1.6 billion to date and seen a drastic rise in demand for its products, which the company claims uses significantly fewer natural resources in its making[1].
With growing alertness and demand for climate action amongst consumers, adopting Environmental, Social and Governance (ESG) measures is now more important than ever for businesses of all sizes to thrive in the present and also future proof itself. In this article, we explore the following ideas:
- what ESG is;
- why ESG’s importance is now growing;
- whether ESG is for businesses of all sizes;
- how your company can benefit from ESG; and
- how you should start working on your business’ ESG policies
What is ESG?
Environmental, Social and Governance matters of any business are interlinked with each other and with the current COVID-19 pandemic, ESG has gained a greater importance among investors, policymakers, and other key stakeholders because it is seen as a way to safeguard businesses from future risks. Before we dive into understanding why ESG is now more important than ever for your business, let us break it down to its basics:
- Environmental, or ‘E’ in ESG, looks at the impact of resource consumption of any business on the environment like carbon footprint and waste water discharge, among other environmental impacting activities.
- ‘S’ or Social criteria looks at how business interacts with communities where it operates. It also looks at internal policies related to labour, diversity and inclusion policies, among others
- ‘G’ or Governance relates to internal practices and policies that lead to effective decision making and legal compliance. ESG facilitates top-line growth in the long run, attracts talent, reduces costs, and forges a sense of trust amongst consumers.
There are different reporting frameworks which are easily available and help companies to disclose ESG-related information. Some of the most commonly used ones are:
- UN Sustainable Development Goals (SDGs)
- Global Reporting Initiative (GRI)
- Sustainability Accounting Standards Board (SASB)
- Climate Disclosure Standards Board (CDSB)
- Task Force on Climate-related Financial Disclosures (TCFD)
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Why is ESG’s importance growing?
There are continuous parallels being drawn between the unforeseen risks of a pandemic and the climate crisis, with both impacting the global economy substantially. This has made many investors and policymakers realize a greater need to accelerate investments and progress on businesses which prioritize ESG. After all, our society is no longer only dependent on the government but also on well-functioning businesses which meet its needs, ranging from employment creation, equitable growth, protection of natural resources, and safeguarding consumers interests, among others.
In the US, ESG focused funds have seen more than a double jump to USD 51.1 billion from USD 21.4 billion, and a nearly tenfold increase from USD 5.4 billion in 2019[2]. In Asia excluding Japan, managed sustainable fund assets almost tripled to USD 36.7 billion in March 2021 from a year earlier[3].
The pandemic has also made corporate governance a very nuanced task, which requires making important decisions related to business strategies, employee well-being, risk mitigation and managing stakeholders in an unprecedented environment.
Is ESG for businesses of all sizes?
While large businesses could afford to have dedicated teams to look after their ESG measures and benefit from them, small businesses can benefit from faster decision making, flexibility and closer contact with their customers which helps them better understand their needs.
Small ‘green’ steps like switching to greener packaging, digital receipts, usage of renewable energy, and effective waste management taken by small businesses can go a long way in helping them save costs as well as reduce their carbon footprint.
As investors seek to invest more in companies with high ESG standards, small and medium enterprises (SMEs) with a strong ESG focus will be in a better position to attract interest[4]. Having high ESG standards lowers SMEs’ risk profile by adding to their top-line growth and reducing operational and regulatory challenges.
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How do ESG policies benefit your business?
More and more businesses are being introduced to the multi-faceted and all-permeable benefits of ESG like attracting talent, targeting future consumers, facilitating brand-enhancement and innovation. Overall, ESG equips the business to become resilient in the current and possible future scenarios. Let us break down its major benefits in detail to understand why ESG is more important now than ever:
- Adds to the top-line growth
It’s easier for businesses to enter new markets and expand their operations in the existing markets if they have a strong ESG approach. Governments facilitate access by giving licenses and issuing permissions to such companies.
As per GreenPrint’s Business of Sustainability Index[5] report released in March 2021, 75% of Millennials are willing to pay more for an environmentally sustainable product in the US and 77% of the overall sample size are concerned about the environmental impact of products they buy.
- Leads to reduction in the costs
Companies which switch to more sustainable methods of production tend to be more efficient and reduce their costs. One such example is Nestlé, which announced that it will invest up to USD 2.1 billion by 2025 to shift from virgin plastic packaging to food-grade recycled plastics and the development of other sustainable packaging solutions. This will not only help it cut its carbon footprint but also save it from non-compliance costs among different geographies where it operates and have stricter laws related to the use of plastic packaging.
- Effective management of regulatory compliances and stakeholders
All businesses are affected by some or other forms of regulations depending upon the markets they operate. The business with strong ESG measures, especially on Governance, invite less scrutiny from the regulators and have greater operational freedom. They also face less pressure from climate change from activists, employee unions etc. The consumers also prefer such brands too. For example, Starbucks introduced “Starbucks China Parent Care Program” in 2017 which provided health coverage to over 10,000 parents of Starbucks’ employees in China. It was seen as a strategic move as Starbucks planned to expand in China amid the growing trade dispute between USA & China.
- Attracting talent and boosting employee’s productivity
It is noted that strong companies with good ESG scores attract better talent and have longer retention. Having a clear sustainability agenda generates an internal sense of pride among employees. The younger generation prefers to work for companies with stronger commitments towards society. As per a study by Cone Communications on Millennial Employee Engagement in 2016, 64% of Millennials consider a company’s social and environmental commitments when deciding where to work.
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How should you start working on your business’ ESG policies?
A business must consider different factors while deciding its ESG policies. To begin with, it must assess where it stands when it comes to adopting ESG measures. Is it just starting, or has it already taken steps towards ESG. This will help to answer some key questions such as:
If you are thinking to adopt ESG policies for your business-
- Determine the most critical areas where ESG needs to focus on
- Conduct an assessment among your investors, board, employees and customers which helps to identify key priority areas for ESG
- Learn about different ESG standards, frameworks and policies
- Allocate resources and define your strategies with accountability measures
If your business has already started developing ESG measures and gone beyond the above stage-
- Become signatory to different relevant standard and reporting frameworks and check for your business’s industry standard benchmark
- Run your ESG measures through different internal assessment and make sure it meets the required guidelines
- Make your ESG strategy meet the required operating and governance model as stated by the investors and existing compliances
- Keep yourself updated with the changing regulations, and needs of your stakeholders
- Engage with other business, associations, regulators and stakeholders to build collaborations and progress towards greater impact and shaping better ESG practices
Businesses which are highly committed towards their ESG policies, make it a priority for the senior management and tie compensation to ESG metrics[6]. As per a survey by Pay Governance in January 2021[7], 29% companies have included ESG metrics in their incentive compensation plans compared to 22% in 2020.
These companies are reporting ESG targets, and progress towards meeting them, to all stakeholders via the annual reports, internal corporate communications and/or annual sustainability reports on their corporate website.
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In conclusion
Businesses of all sizes must prioritise ESG for both short-term and long-term benefits, they must constantly adapt to changing compliances and demands of different stakeholders. RegASK’s ESG Horizon scanning offers AI-based capabilities to help your business keep up to date with any ESG-related change in the regulatory compliance. Businesses must keep themselves updated on the ease of access to the vast amount of data and frameworks, cut costs and manpower time through ease of implementing their ESG strategies. RegASK’s advanced technology allows businesses to access information which matters to them in a seamless manner. Its wide pool of sector experts and consultants help businesses make complex decisions and be more ESG ready. And lastly, businesses should also have access to timely information of its ESG performance that allows it to maintain healthy investor relations.
The rewards also lie in accelerating growth, cost-reduction, effectiveness, attracting talent, and targeting the consumers of tomorrow, i.e. the Millennials and Gen-Z, which highlights why ESG is more important now than ever[8]. Integrating ESG has been proven to be not only a smart move for businesses but also for the environment, society, and humanity at large.
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References:
[2] morning star.com – A Broken Record: Flows for U.S. Sustainable Funds Again Reach New Heights
[4] cnbc.com – ESG index funds hit $250 billion as pandemic accelerates impact investing boom
[6] ipe.com – Integrating ESG issues with executive pay
[7] paygovernance.com – Inclusion of ESG Metrics in Incentive Plans: Evolution or Revolution?
[8] thefintechtimes.com – Millennials, ESG & the Rise in Ethical Investing
