Why ESG Matters
To say that we’re living in challenging times would be an understatement. We are just coming out of a major global health crisis, armed conflicts and civil unrest are affecting countless lives. Also, climate change and its effects are getting more alarming with each passing year. With such a context, it’s only natural that society is asking its most prominent actors (mainly governments and companies) to come forward and start devising solutions to overcome those issues.
In that light, people are forcing companies to abandon their lifelong pursuit of profit and embrace a more caring approach to doing business. Several signs of this push include people refusing to work for companies that don’t align with their principles, investors increasingly betting on “conscious” businesses, and brands embracing environment, social, and governance (ESG) practices.
The latter is a fascinating phenomenon that’s been growing over the past few years. With corporate social responsibility (CSR) philosophies losing steam and ebbing away, ESG feels like a better approach for companies. That’s because it provides numerous benefits for everyone involved. ESG strategies pave the way for more eco-conscious business practices while also unlocking many advantages for the companies that use them.
What is ESG
Environment, social, and governance (ESG) refers to an approach to assessing and conducting businesses with their ecosystem in mind. In other words, it’s all about considering and understanding how internal and external factors affect companies and what those companies can do to optimize their operations while contributing to improving that ecosystem in which they are immersed.
As its name indicates, there are three major components to ESG:
- This aspect deals with the relationship between the ecosystem and businesses and how they influence each other. It focuses on factors such as greenhouse gasses, pollution, waste, and energy consumption, among others.
- It delves into the business relationships with both internal and external stakeholders. This means dealing with wages, diversity and inclusion, pay gaps, human rights, wealth generation, and safety.
- As its name suggests, this aspect focuses on how companies operate at their highest levels. Basically, this implies looking at executive pay, ethics, taxes, and overall political involvement, among other factors.
As the three components of ESG show, this approach aims to provide a multifaceted framework to rethink how a business operates, considering its overall impact at both internal and external levels.
Why should you care about ESG
Though some cynical business people might see ESG as yet another inconvenience they have to deal with, the reality is that it is the proper approach to the current global challenges. Given the difficulty and complexity of the solutions we need to overcome those challenges, all societal actors must play their parts in developing those solutions. Businesses, with their profits and resources, are in a key position to help with that.
So, the first (and probably most important reason) why you should care about ESG is a profoundly humane one. Companies need to carry part of the weight of dealing with the environmental and societal issues we’re facing while ensuring more transparency in their operations.
This means considering multiple issues through the lens of ESG, from contributing to the fight against deforestation, pollution, and similar problems to having a hand in initiatives against wealth, racial, and gender disparities. Ideally, this would be enough for companies to adopt an ESG-driven approach to business decisions. However, some other factors that should convince even the most skeptical business owners are worth mentioning. Some of them include the ones below.
New business opportunities
Younger generations (millennials and centennials) are more likely to sympathize with companies that define their operations through an ESG approach. Aligning your business with their principles of environmental preservation, social justice, and corporate accountability can turn your brand into a more appealing alternative for the consumers belonging to those generations. Using an ESG approach can meet the needs and aspirations of an increasingly conscious audience.
Cost savings
ESG can help you save some money in two different ways. The first and most apparent is by helping you reshape your operations, products, and services to turn them into more sustainable alternatives. This can lead to reduced waste, a more efficient workflow, and fewer lost business opportunities. ESG can also help you avoid potential fines stemming from a lack of regulatory compliance with environmental or workforce regulations, as you’d be rethinking your operations to benefit all stakeholders.
Better talent recruitment and retention
With more and more people aiming to work for a company with a people-first philosophy, embracing ESG can positively impact your recruitment and retention efforts. Adopting an ESG-driven approach would show potential team members and collaborators that you’re valuing something else aside from profit. In fact, you’d be showing people that you care about inclusion, diversity, accountability, and equity. That can be a decisive factor when people are considering whether to work with you, something you shouldn’t scoff at, given the precarious state of employment these days.
Increased innovation
This might not be evident initially, but ESG can drive innovation up. How come? When you start walking down the ESG path, you’ll begin uncovering issues you never paid attention to before.
For instance, new environmental regulations might force you to change how you manufacture a specific product. Instead of seeing that as an inconvenience, you can frame that as an opportunity to innovate. Given that embracing ESG will present you with multiple friction points, you’ll have to innovate quite often, pushing you to develop an innovation process that can benefit your operations, products, services, and clientele.
Contributing to a better world
As you can see, there are powerful reasons to consider developing an ESG strategy. From a business perspective, this approach can vastly improve a brand’s reputation in the eyes of customers, investors, employees, and society as a whole. Additionally, it can help you increase your operational agility, forcing you to develop a framework with continuous evolution at its core.
But, in my eyes, that’s all additional to the most important benefit of ESG: contributing to a better world. By considering environmental, societal, and governance factors in your everyday decisions, you can create a more sophisticated business strategy that provides you with profits and helps improve the world around you. So, if you’re asking yourself why ESG should matter, keep that in mind: because it can help us fight the issues of today’s world.