If you’re in business, there’s a good chance you’ve heard of ESG. The acronym stands for a set of environmental, social, and governance concerns that touch businesses and organizations all over the world. But what are these concerns, and how do they affect your business?
How does ESG affect my business?
At its core, it’s simple: most people respond better to businesses and brands that share their values and make a positive impact. This includes a large portion of consumers, most business investors, and even many of your employees.
At the same time, people all over have grown more and more cynical of businesses and corporations. The current climate is particularly rough on brands thought to be unethical, inconsiderate, or only concerned about profit.
Research on the subject is clear: ESG is good for business. A 2015 review by Friede et al. of over 2,000 empirical studies found 90% showed a positive correlation between ESG and financial performance.
It’s not about being perfect
For the best shot at long-term success today, businesses must show themselves to be thoughtful. This often requires change. Making these changes takes study — it’s not always simple, and not all ESG concerns will apply to your organization, either.
Remember, businesses needn’t be the flagbearer for any cause, but they should be conscious of the impacts they’re having and make efforts to improve.
ESG, letter by letter
Now that we have a general idea of what ESG is, let’s look at each category in more detail.
Environmental
Every growing organization must deal with environmental issues in some form. Showing a sustainable approach to business and a respect for the environment is a plus for socially conscious investors and consumers.
Environmental concerns:
- Waste management and disposal
- Energy and resource consumption
- Air and water pollution
- Carbon/greenhouse gas emissions
Social
Social concerns are particularly wide ranging, varying from employee issues and community impact to equitable supply chains and consumer safety. Good management of these concerns will gain you confidence with most.
Social concerns:
- Worker safety
- Work-life balance
- Fair wages
- Discrimination
- Diversity and human rights
- Philanthropy and volunteer work
- Community relations
- Lobbying
Governance
ESG governance issues touch on the way an organization is run. Integrity and transparency are just some of the themes present in these issues, and these are especially important to investors. Any doubt in your leadership, your structure, or your procedures can be fatal. Good management of governance issues will give investors confidence their money is in good hands.
Governance concerns:
- Transparent accounting
- Shareholder rights
- Conflicts of interest
- Diversity of leadership
- Corporate performance measurement
Conclusion
While it’s often tempting for companies to focus solely on maximizing shareholder value, this can often prove shortsighted. It’s also exactly the kind of approach that consumers and investors are growing more and more wary of. With long-term resilience on the line, incorporating ESG concerns into your operations is a wise idea for any business today.