ESG, shorthand for ‘Environmental, Social and Governance’, encapsulates a framework for evaluating a company’s sustainability and ethical impact. It goes beyond the traditional sustainability strategies such as resource efficiency, carbon emission reduction, biodiversity and includes factors as varied as equity, inclusion, social impact of business activities, transparency in corporate governance policies and diversity across the board. ESG has gained significant traction since 2020 and is emerging as an important determinant of brand reputation, customer loyalty, investor confidence and the overall success of a business.
Meeting regulatory requirements
Many jurisdictions and governments globally are enacting new regulations for transparent ESG disclosures and curbing carbon emissions. As an example, the Corporate Sustainability Reporting Directive (CSRD) requires companies to disclose their climate and environmental impacts in their management reports and even applies to companies based abroad that have a presence in the EU. Many companies are therefore proactively addressing ESG issues to ensure that their businesses stay ahead of regulatory changes and maintain a competitive advantage.
Boosting financial performance
The NYU Stern Center for Sustainable Business have examined the relationship between ESG and financial performance in more than 1,000 research papers. Positive correlations were found between ESG performance and operational efficiencies, stock performance and lower cost of capital. The study also indicated that ESG initiatives were driving better financial results due to mediating factors such as improved risk management and more innovation. Embracing ESG principles help attract investment in new sectors such as renewable energy, technology etc. that support sustainable economic development.
Talent attraction and retention
Employees, particularly the younger generations are placing greater importance on working for companies that prioritize ESG strategies. A March & McLennan study reported that employers with more diversity, carbon reduction goals, and making greater effort to understand employee feelings are more likely to have a high level of employee satisfaction and be popular employment options for new graduates. Similarly, a survey by Society for Human Resource Management (SHRM) found that 53% of Generation Z and 55% of Millennials would relocate for a job with greater ESG initiatives.
Consideration for health and wellbeing
The COVID-19 pandemic has emphasized the interconnectedness of health, wellness, and sustainability within the ESG framework. Companies have not only recognized the importance of providing a safe and healthy work environment for their employees, but also stepped up to support community health initiatives. ESG frameworks encourage businesses to assess and disclose their readiness to respond to public health emergencies including contingency plans, crisis communication strategies and investment in health infrastructure. This prepares the businesses to have robust and structured continuity plans and build resilience to deal with adversity and adapt continuously when disruptions and crises arise over time.
Branding and differentiation
ESG is not only a set of practices or standards, but also a brand that communicates the values and purpose of a company or a product to its customers, employees, and stakeholders. It can foster positive association and impression in the minds of stakeholders or customers who care about global issues such as climate change, human rights, and social justice. ESG as an identity is a powerful way to communicate the sustainability and ethical impact of a business.
