Google searches for the term "ESG" are up over 8x in the last five years, so you are not alone in your curiosity.
In brief, the acronym stands for "Environmental, Social, and Governance." Now that we have that out of the way, why should you care? To be concise, you should care because your investors and your employees are likely to care about whether your company has an ESG policy, if not now, then certainly soon.
ESG is a business framework that evaluates companies on Environmental, Social, and Governance metrics. While the mandate of business has long been "maximize return on investment to benefit shareholders," the ESG framework demands that a corporation also consider the impact of its business on all stakeholders in environmental, social, and governance matters.
In the ESG framework, the environment is a stakeholder, the pursuit of ROI cannot trump responsible treatment of employees, and governance considerations such as executive compensation and board composition are under higher levels of scrutiny.
For example, a company that has adopted an ESG policy might generate a report that includes:
- (E) An analysis or estimate of the company’s carbon footprint
- (E) Policies that require the use of renewable energy sources when available
- (S) A commitment to operate with suppliers that share the Company’s values or a commitment to using an ethical supply chain
- (S) Corporate policies that encourage diversity and commit to fair wages
- (G) A commitment to a more diverse Board of Directors
- (G) A report on executive pay and internal controls
*The above examples are certainly not comprehensive, nor are they all applicable to every company.
The ESG movement is currently being driven by shareholders, regulatory bodies, and public opinion. In response, forward-thinking companies are implementing changes and making those changes part of their PR efforts to be seen as acting more responsibly. There is a large trend towards ‘sustainable investing’ (ESG funds raised $51b in new money in 2020). Many investment funds are tasking their portfolio companies, whether public or private to implement and report on various initiatives. Everything from measuring greenhouse gas emissions (“E”) to gender and racial pay gaps (“S”) and codes of conduct and supply chain risk mitigation (“G”). Many companies in the business services industry may not see themselves as needing an Environmental policy since they don’t directly generate greenhouse gasses, but every company has an environmental footprint that can be measured and managed.
OutSolve has been participating in the “Social” element of ESG for years. In fact, every company with an Affirmative Action Program or a Diversity, Equity, and Inclusion plan already has taken great strides in the “S” category. For those companies, adding on Environment and Governance policies, within silos, can be an easy way to “check the box” for an ESG mandate. However, a well-implemented, integrated ESG policy can be a valuable tool in recruiting and retaining younger workers who care about sustainability and ethical business practices. In fact, a 2016 study by Deloitte indicated that millennials (who will comprise 75% of the global workforce by 2025) are more likely to stay at companies that exhibit a strong sense of purpose and less likely to stay at companies where profit is prioritized over everything else.
It may be tempting for companies to ignore the ESG trend in the hopes that it goes away. Others may choose to wait until regulations, customers, or investors require an ESG implementation. However, OutSolve has been helping its clients move “beyond compliance” to better business operations for over two decades. We are excited to help our clients in this new dimension. For more information about ESG, please contact us here or at firstname.lastname@example.org.