Understand ESG & Its importance to Businesses

The rise of conscious consumerism paired which the shocking effects of the pandemic have made global leaders realize that ignoring the climate threat is no longer an option. With growing climate concerns, consumers are increasingly preferring the brands that are adopting the Environmental, Social and Governance measures.

 

ESG has also shifted the way investors, policymakers and shareholders analyse a company’s chances of surviving in the long term and safeguarding it from an unforeseen future.

 

What is ESG

ESG is the disclosure of data that tracks a company’s strategies and actions towards three-factor: Environmental, Social and Governance.

 

Environmental in ESG measure

 

As the name suggests, environmental (E) assesses the impact of a company’s operations on the environment, activities to reduce carbon emission and its strategies to manage environmental risk. Some examples of environmental factors are natural resource management, carbon emission reduction, and conscious sourcing of raw materials.

 

Social in ESG measure

 

Social criteria examine how a company builds its relations with employees, shareholders, investors, customers and dealers. Customer relations, employee health & safety, etc, are included in this social factor.

 

Governance in ESG measure

 

Building trust with customers, investors and shareholders is a company’s ultimate goal. The governance factor ensures transparency through audits, internal controls, equal pay, shareholder’s rights etc.

 

Here’s why ESG is important for businesses 

 

1.     Attracts long term investors

 

Investors who keep ESG points into consideration are not just concerned by the profits of the next quarter but by a company’s long term vision and contribution to the planet. These investors tend to stay to build a company’s value in long term.

 

As the popularity of ESG is growing, investors are searching for companies with a vision that aligns with the betterment of the planet. Research from Gartner.com states that almost 85% of investors in the US considered ESG factors before investing in 2020.

2.     Clear communication with stakeholders

 

Through ESG, companies can develop channels to communicate efficiently with stakeholders. Activities like company audits, corruption checks and upholding transparency maintain stakeholders’ trust and build stronger relations.

3.     Attract best talent

 

Employees are one of the most important factors that lead to a business’s success and stability. The new-age employees, also known as the millennials, are environmentally conscious and will refuse to work with companies without a strong CSR policy, as per Forbes.

 

Therefore, companies with a strong ESG base will attract employees who are compassionate and are not only associated with the company for profits but to build a better world.

4.     Gives a competitive edge

 

Companies adapting to the changing socio-economic policies are likely to stay in the competition for longer. For example, companies like Starbucks and Nestle have pledged to be carbon neutral. In addition, these companies have made their packaging more environmentally friendly and are increasingly spending more on CSR activities.

 

With the after-effects of the pandemic, air & water pollution and the rising threat of global warming, consumers are more mindful of their actions and choose to be associated with the companies that are in line with their values and are choosing the planet over profits.