For years, we’ve seen the link between outperforming organisations and strong ESG reporting. Those who are quicker to adopt an ESG focus – looking past financial metrics to consider their wider impact – are rewarded with greater profits, increased consumer demand, and improved resilience during trying times.
Recent events – such as the COVID-19 pandemic, increased unrest surrounding climate change, racism, and other deepening inequalities – mean ESG and impact investing are only set to become even more commonplace. People are looking to organisations and institutions that demand better for society.
Here in the UK alone, social impact investing has grown six-fold over the past eight years, increasing from £830 million in 2011 to £5.1 billion in 2019. And that’s not even factoring in the turbulent past eighteen months we’ve all experienced.
But what exactly is ESG? And why is it so important to investors and businesses alike?
What is ESG?
Put simply, ESG is a framework and mode of reporting that discloses data to outline a company’s impact and value. It’s about showing sustainable and responsible business practice, monitoring an individual business or wider portfolio’s ethical impacts.
The new norm of investing, ESG helps investors consider more than financial performance when it comes to making decisions, looking instead at the wider ethics and resilience of the businesses they look to work with. It’s a list of criteria used by financial institutions to assess and understand the risk associated with certain investments, as well as monitoring the business performance of their portfolio over time.
The three areas it covers are environment, social, and governance.
the duration of contracts. Acting as an extension of the government’s predefined 25 Year Environment Plan, this might include opting for more sustainable and conservative practices throughout your projects, as well as ensuring this is a top priority for your wider partners and supply chain.
- Environment – How an organisation’s activities impact the environment and how it manages this risk. This includes both the direct impact of operations, as well as those across the wider supply chain. It might include: reducing emissions, waste management, resource scarcity, ecosystem development, energy efficiency, and carbon offsetting.
- Social – The relationships an organisation holds with its staff, stakeholders, suppliers, customers, and local communities. This might be how it engages with stakeholders and collects their input when forging new strategies. As well as its treatment of people – both minimising harm and going above and beyond to make people’s lives better. It might include: human rights and working conditions, health and safety, diversity, community integration, social value, and mental health and wellbeing.
- Governance – This is about ensuring an organisation is responsibly and ethically run. That the people in charge can be trusted to act in a fair way that aligns with the needs of all stakeholders. It’s about how an organisation is governed, as well as the rules and principles that help steer its course. It might include: board diversity, equal pay, bribery and corruption, and organisational purpose.
Why is it important?
“Better sustainability disclosures are in companies’ as well as investors’ own interests, I urge companies to move quickly to issue them rather than waiting for regulators to impose them.” – Larry Fink, CEO of BlackRock
When it comes to business success, ESG is a key component. It proves critical to the investment decision-making process, helping financial institutions better gauge which organisations are most viable and valuable. It also unlocks profits and funding for companies to make even more of a difference.
ESG for businesses
For businesses, ESG reporting helps financial institutions determine if the organisation is a worthy investment. It makes you more attractive to investors, as well as to consumers, staff, suppliers, and other stakeholders.
Organisations who prioritise ESG activities perform better, with higher financial growth, employee retention, productivity, and reduced costs.
As ESG becomes a standard practice in the business landscape, large organisations will have various regulatory requirements to adhere to – such as SECR. But even for those for whom reporting isn’t yet mandatory, keeping ahead of legislation ensures less risk of legal or reputational issues. It also means you’re better prepared should legislation ever change to include your organisation.
Ethical drivers are 3x more important to company trust than competence, and 66% of consumers consider transparency to be one of the most attractive qualities in an organisation. It’s clear to see why taking ESG more seriously can pay dividends for a business’s bottom line, reputation, and long-term stability – whether you’re legally obligated to comply or not.
ESG for investors
To investors, ESG is valuable for developing portfolios to better align with their values, morals, and principles. It can help them push for change in the areas that matter most to them. While also helping to mitigate investment risk as, like we said above, ESG reporting offers a significant boost for the productivity and profitability of businesses.
By comparing the ESG reports of a selection of organisations, an investor or financial institution can better gauge which investment holds the most potential for positive impact to society.
For investors, a more ethical, responsible portfolio often means a more profitable, resilient one.
An embedded aspect of business
Not only is ESG a framework to respond to, but increasingly, it’s becoming an embedded aspect of the wider business landscape.
COVID has exposed significant, deepening inequalities. Climate change has become even more urgent. Matters of ESG have moved past being a requirement for financial support, instead, working to empower entire organisations to take better responsibility and ownership of our planet and people. In this sense, prioritising ESG is increasingly becoming about investing in the future of our planet and society, as well as ensuring individual success.
“In essence, adhering to an ESG framework means you are future-proofing your business, and those that made this a priority in the years prior to 2020 are also those that have had more tools to deal with the pandemic’s varied impacts.” – Javier Rodríguez Soler, BBVA USA President & CEO
Much like social value, social impact, and CSR, ESG is a word that’s often thrown around, without many truly understanding what it represents. But for any business or investor, ESG will undoubtedly play a critical role in your success, longevity, and positive impact.
At Impact, we empower organisations to maximise their impact through the seamless measurement, evaluation, and reporting of initiatives. To find out more about what our platform could do for you, schedule a demo or get in touch with the team on 0161 532 4752.