ESG: Bureaucratic Burden or Business Benefit

Part 1: What is ESG?

ESG stands for Environmental, Social and Corporate Governance. It is an evaluation of a company’s conscientiousness regarding social and environmental factors. While this definition explains the surface of ESG, it does little to show where the idea came from or what those things mean (beyond the standard definition). To that end, we are releasing a series of blogs to cover the various aspects of ESG. As such, we thought it would be a good idea to start with a general overview of the concepts involved.

Why is ESG? (with apologies to Marvel’s Drax)

So why is ESG even a thing? Money, of course. Investors like to know what they are investing in, and as society is reaching (or past) a tipping point regarding issues like climate change, diversity and regulatory transparency, adherence to new norms is good for business. But how do you prove that you’re doing all you can reasonably do? The answer is ESG.

It may be easiest to think of ESG as a credit score. Most people are aware that a credit score is not the only thing a financial institution looks at when loaning an individual money—after all, if you inherited a fortune at age 16, you may never have opened a line of credit in your life. But these situations are outliers, and a credit score is a good baseline indicator—and so is ESG. A tech company with three people may not have a lot of diversity, but most companies with an ESG rating are not start-ups. They are massive enterprises, and ESG helps investors decide if their money is safe from gross negligence.

A brief side note: for the majority of companies, ESG encompases things they were doing, or at least working towards. Most companies are aware how their business impacts the environment. Most companies want a diverse and inclusive workforce. Most companies crave transparency. All ESG does is give a focal point to these efforts, and more importantly, their reporting.

Environmental: Responsible development and environmental stewardship

Doing bad things to the environment is bad business—this becomes more true with every day that passes. Most ethical companies strive to avoid this, both for moral and fiscal reasons. If a company is found to be flaunting regulations (especially in the event of an unplanned incident), it’s going to be a PR nightmare and tank their stock price, neither of which is desirable. 

Ergo, it makes sense investors want to know that a company they do business with is doing everything within their power to avoid incidents, and, if one should unfortunately occur, that it was pure bad luck and not bad policy—as one investor put it, “Environmental risk is investment risk.” So the “e” in ESG is a measure of that: is a company environmentally responsible? It looks at things like:

• Policies and actions regarding climate change
• Water management
• Emissions and air quality concerns
• Infrastructure and operational integrity

Note: Our next blog will address these items in far more detail

Social: Societal accountability for people and the community

There is virtually no appetite for companies that are seen as regressive. The percentage of people who tolerate this kind of thing at all shrinks every day. Furthermore, a broader look at the “s” in ESG is a look at safety. Safety, including the workforce and the community, is something every company worries about, and pretty much every individual at a company worries about as well, so it holds a unique place in our society. The desire for safety is essentially universal. 

Thus, it makes sense for companies to be measured on these factors, including:

• Diversity and inclusion
• Workforce health
• Safety
• HSE management
• Community focus

Governance: Sustainability Leadership and shareholder value

Good corporate governance is a critical factor in investments. A well run, transparent corporation is a much safer bet than one that is perpetually in the news for scandal and obfuscation. This doesn’t mean KFC will put their secret recipe on the internet (we are aware some claim to have done just that— don’t @ us); it just means that their policies are readily available. 

The “g” in ESG considers factors like:

• Corporate oversight
• Policy assurance
• Transparency
• Ethics
• Regulatory compliance

Conclusion: ESG is good for everyone

A smart, ethical and healthy company welcomes the rise in ESG reporting, as it gives them a forum to market their many initiatives and successes, as well as a way to take stock of what needs improving. Investors welcome strong ESG reports because they show a company is both modern in its thinking and responsible in its actions.

However, as easy as it is to believe this—and even to support it enthusiastically—the mechanics of creating and rolling out an ESG program and strategies is both complicated and nuanced, and that’s what the rest of this series will cover.