What is ESG?
ESG is an acronym for “Environmental, Social and Governance” and represents a new strategy and set of frameworks designed to measure private sector organizations’ baselines and progress toward improvements in those areas. Taken individually in the simplest sense:
Environmental has to do with the impact an organization has on the natural world by engaging in its daily activities. Factors affecting this impact include: types and amount of energy used, natural resources consumed, and pollution generated. Analysis typically includes not just the core company itself, but its supply chain as well.
Social applies to the policies and practices that relate to employee well-being. These include workplace safety and comfort, gender and diversity considerations, and support for employees’ physical and mental health.
Governance refers to an organization’s leadership structure and fairness with respect to the makeup of its board of directors, opportunities, and ability to advance within the corporate structure. This often includes executive compensation among other factors.
Why is ESG important, and currently in the spotlight?
There are several reasons ESG is being talked about at the highest level of corporate and public sector leadership tables right now. Certainly, the necessary and critical focus on the climate crisis is a major driver for the environmental piece and growing race and power structure awareness in the United States and elsewhere rightfully requires attention from boards and leadership. Additionally, organized worker demands are being leveraged by an increasingly employee-advantaged marketplace.
“Attracting and retaining talent. Practices that are good for the environment are also good for attracting talent. Today’s workers are looking for purpose. A recent study from the Society for Human Resource Management (SHRM) found that 94% of next generation workers want to use their skills to benefit a cause. According to this year’s report, 84% of respondents ranked employee retention as “very” or “extremely” important. With over 800,000 unfilled manufacturing roles, a new approach is warranted to solve for the skilled worker shortage”
3 Ways ESG can become your secret weapon (engineeringnews.co.za)
Companies that recognize these forces and work to enhance their policies and practices to reflect the new trends will survive and thrive in the coming years, and companies that ignore them do so at their peril.
How is ESG different from EHS or CSR, previous attempts to address these issues?
Former frameworks like EHS (Environmental Health and Safety) and CSR (Corporate Social Responsibility) were nascent attempts in previous decades to look at these corporate stewardship practices through a more philanthropic or philosophic lens, often voluntary efforts urging companies to engage because it was “the right thing to do”. ESG evolved from these foundational initiatives to address these issues from the perspective of business risk and opportunity, which resonates more clearly with the investment community, and importantly with a set of standards and metrics to quantify baselines and improvements, thus providing concrete data to report on progress.
Standards and Guidance Frameworks
Over the past few years, a number of widely accepted standards and guidance frameworks have emerged, providing companies and organizations with valuable information and measurement tools useful for benchmarking against their progress and those of their peers. A few of the most well know are:
Sustainability Accounting Standards Board (SASB): SASB Standards enable organizations to provide industry-based sustainability disclosures about risks and opportunities that affect enterprise value. In August 2022, the IFRS Foundation assumed responsibility for SASB Standards when it merged with the Value Reporting Foundation, which previously maintained these Standards.
Global Reporting Initiative (GRI): The GRI Standards enable any organization – large or small, private or public – to understand and report on their impacts on the economy, environment and people in a comparable and credible way, thereby increasing transparency on their contribution to sustainable development. In addition to reporting companies, the Standards are highly relevant to many stakeholders – including investors, policymakers, capital markets, and civil society.
Task Force on Climate-Related Financial Disclosures (TCFD): The Financial Stability Board (FSB) created the TCFD to develop recommendations on the types of information that companies should disclose to support investors, lenders, and insurance underwriters in appropriately assessing and pricing a specific set of risks—risks related to climate change.
Carbon Disclosure Standards Board (CDSB): is a non-profit organization working to provide material information for investors and financial markets through the integration of climate change-related information into mainstream financial reporting. CDSB operates on the premise that investors and financial institutions can make better and informed decisions if companies are open, transparent and analyze the risks and opportunities associated with climate change-related information.
International Integrated Reporting Council (IIRC): The IIRC was developed to accelerate the adoption of integrated reporting. In 2021, the IIRC merged with SASB producing the Value Reporting Foundation (VRF). The goal of this effort is to create a baseline for corporate sustainability disclosure that can be used globally.
Companies seeking to measure their own baselines and progress toward ESG goals typically use one or a combination of these standards and/or frameworks to hold themselves accountable to improve over time.
Constituents and Stakeholders
Researching and implementing ESG standards, frameworks, and measurement/reporting methodologies appropriate to your organization will have a significant positive effect on several key stakeholders: employees, customers, and investors. Increasingly, all these constituent groups are seeking and even demanding accountability on ESG measures, and while the initial capital investment in setting up your ESG program will take some time and effort, many believe it will be necessary for success in the coming years.
“Leaders and boards that are still debating the importance of establishing an ESG strategy rather than working together to implement one are in danger of being left behind by stakeholders. The companies leading the transition to ESG risk management present a vital investment opportunity for stakeholders and are essential to achieving a more environmentally and socially responsible world.”
Three Steps For Engaging The Board In ESG Initiatives (forbes.com)
“There are some key ways that ESG can add value for a business and expand human possibility on one’s digital transformation journey: Forging environmental stewardship. Manufacturers that focus on sustainability and ESG initiatives find gains in efficiency, help the planet, and, as a result, are more attractive to the talent they are looking to recruit.”
“According to Forbes, adopting an ESG policy is about so much more than “doing the right thing”:
“In a recent article on Business Fitness, former Unilever CEO Niall FitzGerald once said that ESG is a vital part of any company strategy, ‘not because it is a nice thing to do or because people are forcing us to do it … but because it’s good for business.”
3 Ways ESG can become your secret weapon (engineeringnews.co.za)
For more information about how Myna Partners can assist your organization with their ESG efforts, please contact: Dave Cohen, at dave.cohen@levelupconsult.com
