What Does It Mean To Be An ESG Company?
ESG means using Environmental, Social, and Governance factors to evaluate companies and countries on how far advanced they are with sustainability.
In recent years, investors have placed increased emphasis on a company’s sustainability performance when choosing where to invest. When the Chartered Financial Analyst (CFA) Institute conducted a survey of 7,200 investors and financial industry practitioners, results revealed that 85% of investment managers now rely more on ESG, an acronym for environmental, social, and governance criteria, as a relevant factor. COVID-19’s impact on the stock market is one reason for the current trend. Compared to other businesses in their industries, companies with ESG values were not as negatively impacted.
As a result, an increasing number of companies are adhering to the ESG standards, set by groups like the Sustainability Accounting Standards Board (SASB), an organization that develops systems for businesses to stay on top of financially-material sustainability and for them to convey relevant information to their investors. With investors paying close attention to both financial and non-financial activities, it’s important for companies to target areas within their own infrastructure that can be improved via the integration of ESG criteria.
Environmental standards impact a business’s commitment to improving the environment. Some examples include developing climate change policies, recycling practices, and employee incentives that promote greener travel habits.
Social standards include a company’s treatment of its employees and consumers. Some of those steps include diversity training, positive work conditions, and consumer protection through recalls and regulatory penalties when necessary.
Governance standards provide a view of management’s relationship with its board and stakeholders, as well as its employees. An ESG company would focus on matters such as the separation of chairman and CEO roles, transparency of shareholder communications, policies surrounding ethical business practices, and the treatment and compensation of employees.
ESG companies working in different industries may not have the same priorities when following ESG standards. For instance, while a company in the health care sector may choose to invest its efforts in pricing life-saving medication more affordably, a transportation organization might focus on matters like air quality or greenhouse gas emissions. The companies’ differing concentrations do not detract from their social consciousness.
After creating and following ESG goals, companies are encouraged to report their ESG milestones. While not yet required in every country, reporting allows investors and stakeholders to properly gauge a company’s financial wellness, as well as provide incentives for employees to remain with the company. Additionally, the large percentage of public companies that voluntarily disclose their ESG activities has set an unofficial standard for others to follow. In any case, it is likely that more companies will fall under the requirement of reporting their ESG objectives and achievements in the coming years; an early start would certainly result in a smoother transition to ESG compliance.
With the breadth of knowledge and resources available on the topic, there is no better time than the present to transform your organization into a well-rounded ESG company, helping to create a business culture that is built on ethics, environmental mindfulness, and general awareness of the impact our corporate actions have on those around us.
The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.