Why Corporate Leaders Need an ESG Focus
A focus on environmental, social, and governance (ESG) issues is no longer a nice-to-have for businesses — it’s required.
A set of new paradigms — from employee engagement to sustainable practices ˘— are now requirements for business success. Stakeholders, especially investors, demand that organizations consider how ESG factors impact their business. Added to this demand is an expectation of clear communication around plans to address these issues.
ESG is itself a broad and layered topic. Companies can position themselves for long-term growth by honing in on areas relevant to their business. However, this begins with understanding what ESG is and how it impacts business.
What Is ESG?
Nasdaq defines ESG as “a broad set of environmental, social, and corporate governance considerations that may impact a company’s ability to execute its business strategy and create value over the long term.”
ESG has its roots in the investment world. The term was first introduced as part of the UN’s Principles of Responsible Investing, which shared actions for investors to incorporate these issues into investment practice.
More broadly, ESG is used to describe a company’s overall sustainability strategy, sometimes alongside the concept of Corporate Social Responsibility (CSR). The pillars under ESG include:
- Environmental Pillar: The Environmental pillar of ESG measures the impact of an organization’s practices on the planet. This includes how it responds to pressing issues such as climate change. Other criteria include air and water pollution, biodiversity, energy efficiency, recycling and waste management, and deforestation.
- Social pillar: The Social aspect covers how a business treats and values people or stakeholders. This includes employees, customers, and the local communities in which they operate. Examples of topics under this pillar include:
- diversity, equity, inclusion, and belonging
- community impact
- employee experience
- human rights
- product research and development
- Governance pillar: Governance refers to corporate leadership standards or how an organization makes decisions and holds itself accountable. Board and leader diversity, business ethics and compliance, CSR strategy, and public policy and engagement all fall under this pillar.
What’s Driving ESG Growth?
For the past decade, there has been a rapid rise in ESG as a focus for businesses. Investors and regulators recognize the role of corporate responsibility in mitigating risks to the growth and longevity of an organization. As such, investors are keenly focused on how an organization addresses and reports its ESG strategy.
Regulators are also putting measures in place to require positive change. For instance, last year, the SEC approved Nasdaq’s new listing requirements to improve transparency around board diversity. The SEC is also expected to introduce new rules requiring environmental disclosures that will also serve to increase transparency and accountability. Undoubtedly, the need for urgent action to address the climate crisis contributed to these new SEC rules.
In 2021, the IPCC released a climate report emphasizing the need to move quickly to achieve sustainability targets and limit global warming to 1.5C. COP26, the UN’s Climate Change Conference, was also a call-to-action for the private sector to play an active role in achieving these goals. With COP27 scheduled for November, it will be interesting to see how far organizations have gone to fulfill their pledges to address the climate crisis and commit to a just transition to net-zero.
The growing interest in ESG has also been driven by social factors such as concerns around systemic inequalities, which have only grown during the ongoing pandemic. According to the 2021 Edelman Trust Barometer, 86% of U.S. adults expect business leaders to speak out on public issues. Customers are also willing to support organizations that take action on the issues that are important to them — a 2020 Consumer Culture Report found that 71% of consumers prefer buying from brands that align with their values.
This preference for aligning with companies that hold one’s values applies to the employer/employee relationship as well, especially during this pandemic. Employees are increasingly vocal about their expectations, including the impact of an organization’s practices on the community where it operates. Millennial and Gen Z employees, for instance, are more active than older generations when it comes to caring about and addressing issues like climate change.
Employees increasingly place issues such as diversity and inclusion, mental health, and workplace flexibility top of mind, and they’re not afraid to leave if unsatisfied with the actions of their current employers.
Preparing for the Future of Responsible Business
Globally, stakeholders use ESG factors to determine whether or not organizations are prepared for the future. Corporate leaders must pay attention to concerns on how corporations are standing up for human rights, building sustainable businesses, and being good stewards of the environment.
Some steps leaders can take to make progress on ESG issues include:
- Take a deeper dive into each area of ESG to learn how they impact your business operations.
- Conduct a materiality assessment to identify core issues or activities that impact your business, industry, and stakeholders. This will also help inform your overall sustainability strategy and ESG priorities.
- Review your company operations, policies, and practices to identify areas where to make a positive impact. This includes reviewing your supply chain to ensure your vendors and suppliers align with your values and goals.
- Set clear goals, action steps, and accountability measures to ensure you follow through on commitments. Additionally, advocate for public policy action where possible to expand impact beyond your organization.
- Share reports annually to track year-over-year progress. ESG or sustainability reports that align with well-known reporting standards and frameworks can help increase transparency around ESG efforts.
There is no universal plan or solution for corporations to address ESG issues. But the bottom line is clear: leaders must take action. The future of responsible business demands that corporate leaders pay attention to ESG issues to ensure the long-term sustainability of their business.
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