As environmental concerns further infiltrate the business world, and as both consumers and investors demand more socially progressive and eco-conscious business practices, there is a growing interest in the ethical status of individual companies and their responsible green operations.
In fact, recent research has suggested that almost half of Americans would stop supporting companies who refuse to take this responsibility seriously, while investors across the globe are increasingly looking to include sustainable investments within their portfolios, and in some cases, divesting entirely from the most destructive of companies.
As part of this movement towards sustainable investing, the ESG framework is gaining popularity. But what is ESG? And how can businesses leverage the strategy to become both more sustainable and more attractive to this new wave of investors? Here, we break down the ESG concept and strategy and how it can benefit your business.
What is ESG and why is it important?
At its core, ESG is a framework for evaluating the social and environmental practices of a given company or set of companies in the context of investments. Investors, or companies selling services or products to investors, use these standards to screen a company’s commitment to sustainability through their existing practices, policies, and philosophy.
ESG stands for Environmental, Social, and Governance; three criterium that help investors and stakeholders evaluate a company’s sustainability across a broad range of behaviors. These behaviors cover a spectrum of issues that have traditionally been excluded from financial analysis. They include but are not limited to:
Previously, socially and environmentally conscious financial products were perceived as inferior to their conventional counterparts, in part, because these types of criteria narrowed the pool of possible investments. However, as market leaders such as Apple and Google have begun to blaze a trail, both with attractive share prices and progressive policy, the trade-off between sustainability and profitability is becoming a thing of the past.
Today, ESG-business practices reflect the changing mindsets of business leaders, consumers, and of course, investors themselves. Now, particularly as young investors seek to align their money with their values, brokerage firms and investment companies are being pushed to expand their services to include ESG ETFs (exchange-traded funds) and other financial products.
What is the ESG framework?
Currently, there is no centralized ESG framework, and while the factors considered are broadly the same, each investor or investment company may choose to analyze and score ESG factors how they wish. Additionally, third-party data analytics companies are competing to offer the most accurate and expansive ESG scoring systems using ever-larger data pools.
This means that, while adopting more ethical policies and practices is likely to boost your ESG score, it remains difficult to identify the exact areas in which your company may improve. That being said, “doing the right thing” goes a long way to putting you on the path to a good ESG score.
How can ESG benefit my business?
ESG has the potential to benefit smaller companies as much as it benefits the biggest. Today, investors are moving away from opportunities that focus only on the bottom line as they look to balance the ethical performance of a company with profitable investments. In reality, this means that a good ESG score can attract investors over and above your company’s financial performance.
However, if you’re asking ‘What is my ESG score?’, then the answer may be difficult to find. As previously mentioned, ESG scoring systems are opaque, and while the industry is being urged towards developing a more consistent and transparent scoring system, today the only way to push your company forward is to continue to adopt progressive policies and ethical practices on a day-to-day basis.
Transparency is also a key factor for your business. You can benefit on two fronts by providing comprehensive information on everything from your waste management to your employee policies. Further than your Corporate Responsibility Report, regularly updating your ethical policies and making them easily available also allows consumers and investors to find the information they are looking for, pushing both your ESG score and your company image in the right direction.
“By arming our clients with data and insight into the impact of their consumption and production, and providing recommendations for improvement, RTS assists businesses in developing first steps to become publicly accountable and transparent. While there is no one-size fits all solution to become more sustainable, we aim to think of interconnections within ESG and apply it to our own operational framework. Often times environmental issues are also social issues, and we must keep that in mind when we are talking about things like utilizing incineration plants, prioritizing reuse, and collection route efficiency.”
-Greg Lettieri, RTS CEO and Co-Founder
For more information on how to push your company’s sustainability to the next level, contact our TRUE Advisors today and stay tuned to the RTS blog.