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What is ESG and Why Does it Matter?

CSR, sustainability, DEI, social impact, ESG – there are so many words and acronyms in business governance that it can be hard to figure out what is what. For many years, businesses have dabbled in various aspects of sustainability and social impact. What has changed in recent years however is that this commitment to the broader stakeholder community has come to be seen as beneficial to business and shareholder returns and has now been incorporated into the governance strategy of many public and private firms.  This broader governance approach is called Environmental, Social, Governance (ESG) and links together the concepts of CSR, Sustainability and Governance. This article deals with the broader benefits of ESG and why it matters.

As mentioned, ESG links together the earlier concepts of CSR and sustainability with governance practices. Many businesses are already doing activities that may touch on social or environmental causes, but ESG frameworks create a formal and more robust tie in with a company’s strategy. There are no set rules necessarily, but ESG frameworks often involve certain best practices such as embedding social, people or environmental aspects into a business’s strategy and tying goals around it, including compensation. AS it becomes part of a company’s strategic objectives, culture and performance can be tied to it and aspects such as hiring and skills often evolve to have an ESG component. Another component of ESG is risk management and also embedding ESG related processes and risks into a company’s risk management system.

So, why does this matter? Lets start with the obvious, no matter the reason that businesses are moving towards a more socially impactful approach, this is a great sign that stakeholders are seeing the benefit of businesses making a positive impact in the communities they serve and for their employees. The fact this is happening is only good for all the stakeholders impacted by a business.

But there are real tangible business benefits too which are driving this. First, there is significant data showing higher returns for businesses with stronger and clearer ESG commitments. Its also good for a company’s brand reputation and impacts its ability to grow and invest when stakeholders see a business as being responsible. Employee retention is also shown to be stronger in high ESG businesses as employees are looking for more than just a pay cheque and now turn to their employers to provide a sense of community and greater purpose.

Another factor that is more difficult to see is the ability to reduce risk to your business. There are always risks (and opportunities) that a business faces, both short and long term. If a company takes a more ESG focused approach to supply chain, inputs, processes, waste outputs, even financing, you can significantly lower your risk of being impacted by a future damaging event whether it be a natural disaster, a reputational incident/crisis, geopolitical turmoil, legal, or other resource constraints. I will explore this further in a future article, but a simple example is a company could decide to adopt a new process that reduces their waste by X%. This might incur some higher upfront cost, but can lower long term waster costs and can have a positive impact on their brand. It can also be impactful in the future should regulations change or limitations are put in place on waste.  Another company that hadn’t made that investment could be left scrambling with fewer options and higher costs. This is a very simplistic example, but you can see there are any number of thought experiments you could do where making the right ESG related decision could protect from future downside risk. Like I said, I will explore this further in future articles.

Hopefully this gives you a basic overview of ESG and why it can make a difference to your business. Future articles will explore best practices and trends in ESG as well as risk management.

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