ESG: why you should start taking action

Environmental, social and governance (ESG) are the three dimensions to sustainability that organisations embed in their operations and report on. Whilst it is not currently mandatory for some businesses to adopt ESG goals and report on them, the Government have announced their intention to make Task Force on Climate-related Financial Disclosures (TCFD) mandatory across the UK economy by 2025. In this article, we discuss what ESG is, why you should care about it now.

What is ESG?

In the last few years we have increasingly heard the acronym of ESG, but what purpose is it actually designed to serve? ESG as a concept is used universally by investors to assess corporate behaviour and to evaluate the future financial performance of the company by measuring their sustainability. In other words, ESG has brought a holistic approach to measuring company’s performance by encompassing all stakeholders and society as a whole. As a result, it is no longer acceptable to focus on shareholders’ returns at an expense of the wider stakeholder community and the planet.

Whilst it should be at the forefront of directors’ minds, it is important that all stakeholders appreciate the current and future importance of the organisation’s ESG standards and that they are passionate about them and can find a way to contribute toward them too. All stakeholders need to share the same vision for a company’s ESG standards in order to successfully deliver on their ambitions.

What does it stand for?

E – This is the Environmental component of ESG; the part that the majority of people are familiar with. It includes – but is not limited to –

• Your company’s contribution towards climate change, and the steps you are taking to address this;
• Any action your company is taking to reduce carbon emissions;
• Reporting on your contribution to pollution (air, land and sea), and what you are doing to reduce this; and,
• Whether you are addressing harmful environmental issues in your supply chain such as deforestation.

Perhaps this area of ESG has the most focus upon it due to how topical it is currently, with the adverse events of climate change, scientific evidence, the rise of millennial and generation-z environmental activists, and how publically organisations can be scrutinised by their stakeholders if they are negatively impacting the environment.

With the UK’s commitment to achieve net zero by 2050, it is even more important that companies start embracing the environmental aspect of ESG. In order to successfully report on your company’s environmental contributions, you will need to measure your carbon emissions and have a plan in place in order to reach your own net zero goals.

S – This is the Social component of ESG, often confused with ‘sustainability’, and often pooled together with environmental issues. ESG has brought a social element to a company’s performance, and an assessment of a company’s social sustainability includes how they impact all stakeholders. Social reporting often lags behind environmental reporting for many different reasons, including, challenges around the definition and the lack of generalised rules for social reporting which means organisations don’t often strive to achieve it.

When reporting on your organisation’s social impact, you may ask ‘how do we affect people – our employees, our customers and suppliers, our local community and the wider community too?’ Firstly, companies should start with employees’ wellbeing and engagement, always start with how you impact those closest to your company first. It can be difficult to define the impact you’re having on the whole of society, however, being forward thinking in your approach by addressing societal problems on a local and national scale, such as poverty, social inequality and mental health issues all contribute to improved impact your organisation has on your local community and wider society. You can also consider how you impact society from your product or service’s perspective. Businesses need to create greater value for their products which in turn improves the quality of life for people. It is hoped in the future that social reporting shall become harmonised to encourage organisations to identify areas where they can improve their impact on society.

G – This stands for Governance. Reporting on this predominately covers factors that contribute to the policies and procedures by which an organisation is run – and simply comes down to how organisations make decisions, comply with law and meet the needs of external stakeholders. Good corporate governance is vital to an organisation’s long-lasting success. Reporting on governance includes;

• Demonstrating clear organisational purpose and values embedded in the business
• Overseeing and examining your organisations decision making, including the board and senior executives
• Board diversity
• Reporting on transparency and accountability
• Stakeholder engagement
• Ethical standards

Why does ESG reporting matter?

Retain and gain clients/customers/prospects

Customers are becoming increasingly demanding of sustainable and eco-friendly products, more sophisticated when assessing a company’s ESG credentials, and generally more aware of how companies are contributing to wider society. As a B2B, you may have existing clients/customers who are expecting you to adopt ESG reporting in order to align to their own ESG goals as part of their engagement with the company. It appears that those businesses that are engaged, understand and actively report on their own ESG are the ones that will gain advantage against their competitors, who are not integrating ESG in their business operations.

Access to capital

Investors are more conscious and willing to appraise companies based on their ESG standards, with many feeling pressure to invest in sustainable businesses due to changing societal views on how businesses should operate. Many investment portfolios now have ESG information as part of their investment decision making criteria, with 85% of investors considering a company’s ESG factors in their investments in 2020. Thus, adopting ESG goals and implementing it into the company’s strategy will also help with accessing capital.

Futureproof your business to all stakeholders

Beyond potential monetary benefits and opportunities that ESG reporting presents, it allows businesses to evaluate their consumption, supply chain and day-to-day decisions and create an environment that is future proof for everyone. There is a clear correlation between the engagement of existing people and the attraction of future talent, with MMC research suggesting that ESG scoring companies have a 14% higher satisfaction rate and are 25% more attractive to young professionals. There is no doubt that people will want to work in forward-looking and inspiring companies that care beyond profit. With millennials and generation-z making up 72% of the global workforce by 2029, this segment places greater importance on environmental and social concerns than their predecessors, with expectations on their employers to care for ESG being higher.

This article was written by the SCF team at Price Bailey LLP. We have invaluable experience of the early-stage funding market, global market intelligence skills and all-things sustainability. If you are considering incorporating ESG into your business strategy, and are unsure of where to start, or would like further advice then you can contact us using the form below.