Conscious consumerism has grown exponentially over the last decade. In response, multiple companies from different industries have changed their approach when providing their goods and services, from the way they deal with their employees and their leadership structure. Far from being just a corporate trend, integrating sustainability frameworks in the company’s policies, regulations and reports is necessary to stay relevant in the long run.
Government institutions, multinational firms and investors demand corporations and organisations assess their long-term sustainability by outlining their ESG framework and recognising how risks and opportunities factor into their business and create long-lasting value.
In this article, we look at how ESG is crucial for most businesses and how it increases their value to sustain them for years. We also look at how the ESG and sustainability relationship can enhance corporate reputation by establishing business objectives that align with the criteria set by investors.
What’s the Difference Between ESG and Sustainability?
Some corporations use ESG and sustainability interchangeably. However, they are different, and sustainability is only one aspect already integrated with ESG.
Sustainability is a term that has long been used in the business world to mean using resources ethically and responsibly. In much simpler terms, it means doing good. However, over the years, this definition has sown confusion over its usage due to its ambiguity and its meaning has since been diluted.
To get rid of this ambiguity and to clearly define what it entails in the context of businesses and industries, investors have started to use the term ESG which stands for environment, social and governance.
What Is ESG?
Environmental, social and governance aspects are the three pillars of sustainability frameworks but have since evolved to become a criterion to safeguard businesses from future risks.
These three dimensions are interlinked and aim to provide investors with a measure to properly accelerate investments and progress in businesses that include ESG in their policies and guidelines. There are multiple ways to disclose ESG-related information using reporting frameworks that companies can use. Here are a few common ones:
- UN Sustainable Development Goals
- Global Reporting Initiative
- Sustainability Accounting Standards Board
- Climate Disclosure Standards Board
- Task Force on Climate-related Financial Disclosures
These reporting frameworks have a common denominator: they clearly define the factors included in each of the three aspects of ESG.
Let’s look at these three dimensions and their factors to help us understand ESG holistically.
Environmental
The ‘E’ in ESG stands for the environment and looks at a company’s business practices that may affect the environment positively or negatively and promote sustainability. It provides the company with an overview of its environmental impacts, such as energy consumption, waste management, pollution mitigation, land use and more. The ecological aspect aims to question companies with regards to concrete plans on how they address environmental factors, including:
- Climate change
- Land use
- Pollution
- Biodiversity and ecological sensitivity
- Deforestation
- Energy efficiency
- Freshwater availability and water management.
Social
The social aspect deals with a company’s business relationships and how it affects its employees, consumers, partners, institutions and communities. Investors look at relationships fostered inside and outside the company, such as community outreaches, volunteerism, diversity and inclusion, labour rights and more. Social criteria include the following factors:
- Consumer satisfaction
- Data privacy
- Diversity and inclusion
- Employee engagement
- Health and safety
- Community engagement
- Human rights
- Wealth creation and employment
Governance
This aspect is crucial in ESG as it determines the company’s policy and guidelines driving environmental and social factors.
Governance focuses on the company’s leadership, structure and policy-making that help it comply with laws, make effective decisions and meet the needs of its stakeholders. The following governance factors help companies adhere to ESG guidelines:
- Purpose
- Governing body quality
- Stakeholder engagement
- Ethical behaviour
- Risk and opportunity oversight
- Bribery and corruption
- Executive compensation
- Lobbying
These factors are measured quantitatively and qualitatively. By doing so, it offers political institutions and investors a complete structure of the company’s mission, vision, policies and regulations to help them decide whether the company is worth financing in the long term.
Can You Apply ESG to Small Businesses?
Larger corporations have teams to oversee and measure their ESG framework to reap its benefits, but that’s not to say small and medium enterprises (SMEs) can’t follow ESG guidelines and benefit as well.
Financing institutions and banks now include ESG compliance as a criterion to consider any business for financial lending and investment. Financial institutions also give priority to SMEs with a high ESG focus. These SMEs are also better positioned to attract interest and talents that may boost productivity.
Why Is ESG Important for Australian Businesses?
There are multiple benefits to adopting ESG policies and guidelines. ESG future-proofs the business and reduces financial risk, driving investors to consider financing you in the long run. Companies that have started complying are also reporting better brand visibility, innovation drives, higher profits and cost reduction.
Let’s look at some crucial elements to understand why ESG is now a significant consideration for businesses of all sizes:
- Adds growth and enhances company reputation—Businesses with high ESG ratings find it easier to expand their operations and enter new markets due to their excellent reputation and standing. Businesses with ESG compliance are also given access to licences and permissions.
- Reduces cost—Switching to sustainable and efficient manufacturing methods can significantly reduce production costs and avoid non-compliance costs for unsustainable practices, such as using plastics in packaging.
- Risk reduction—ESG can identify immediate and long-term risks relevant to the industry or business model and provide sound advice for sustainable practices.
- Promotes culture and intrinsic value—ESG maturity is a good indicator for promoting an inclusive culture that boosts employee performance and productivity.
- Effective management of stakeholders and compliances—An excellent ESG standing enjoys more operational freedom. The company faces less pressure and scrutiny from regulators, labour unions, activists, etc., and consumers naturally gravitate towards the brand.
- Attracts talent and interest—The millennial workforce is also conscious of a company’s ESG standing and prefers to stay and work long-term for companies with a clear ESG agenda. These companies also tend to attract better talents with longer retention and have a more satisfying outlook at work.
How Madison Marcus Can Help You
Adapting ESG policies and frameworks to your business is not only a trend but a necessity that may see your company benefit from it in the long run. You need to adapt to ever-changing regulations and compliances and meet your stakeholders’ demands. Integrating ESG is a smart move and benefits your company, the environment, society and humanity.
Madison Marcus offers consultation and sound advice on ESG policies and guidelines to help your business thrive and adapt in these uncertain times. Our team of experts has a broad range of experience in advising corporate entities, from their initial compliance measures to assess the impact of their operations and their supply chains. Our areas of expertise include business and human rights, green and sustainable finance, impact investment, climate change-related litigation, corporate governance, reporting and disclosures, and ESG-related funds and asset management.
For all enquiries, contact us here.
