Environmental impact, social responsibility and corporate governance – in short, ‘ESG’ – criteria are being used by a growing number of organisations today to evaluate their performance from the sustainability and ethical practice perspectives. This stems from concerns arising from the impact that companies have on their environment and society as a whole. Environmental impact refers to the organisation’s efforts to reduce the negative impact on the environment stemming from its business activities. Social responsibility covers its treatment of stakeholders: employees, customers, suppliers etc; corporate governance refers to how it is managed, its compliance and ethical standards.
Issues like the use of renewable energy, waste management, water conservation, environmental pollution, degradation and conservation, are becoming more significant. Stakeholders, not just shareholders, are expecting firms to take the necessary steps to reduce their carbon footprint, curb their greenhouse gas emissions and minimise their environmental impact. The implications of climate change and all its related problems, are gaining traction. Companies are also expected to be aware of human rights-related issues connected to labour, compensation, and safe workplace practices.
Stakeholders want to see corporate sensitivity when it comes to the communities in which they do business; they want to see active corporate involvement in local communities and results of corporate strategies that are put in place to improve social outcomes. Firms are expected to set in place, and adhere to, high ethical standards when it comes to matters of corporate governance, including compensation, diversity and transparent reporting. All this points to the fact that ESG factors are growing in importance and can create a significant impact on a company’s long-term growth, competitiveness and sustainability.
But ESG, appropriately applied and managed, will also better position the firm for future-readiness, particularly from the standpoint of regulatory changes. Companies that prioritise ESG factors may have a lower risk profile than others, be less vulnerable to market fluctuations and unstable prices of fuel and other resources; plus enjoy a higher reputation among consumers, who may also make up the majority of their investors. Firms are already finding it more impactful to include ESG factors for consideration when making decisions and setting organisational strategy. Given these advantages, how should risk professionals help their organisations be ESG-ready?
Firstly, they should be aware of the factors that will help their respective organisations gain high ESG scores as a high ESG score indicates that the company is taking steps to minimise the negative impacts that its operations may have on the environment and society/community, while practising good governance. They should be aware, for instance, of what measures the company has taken to reduce its carbon footprint, or increase its use of renewable energy, reduce energy and water consumption, or increase its recycling efforts. In other words, they should understand what it takes to be considered ESG-ready, from different perspectives.
The company should have robust policies in place for fair wages, safe working conditions, equal opportunities and gender diversity. It should be seen as demonstrating its commitment to the overall well-being of its stakeholders and the community in which it operates. In the area of good governance, risk professionals should push for transparency in reporting and ethical business practices, such as arm’s-length transactions and the avoidance of situations where conflicts of interest may arise. Companies with robust governance are likely to be more transparent, and achieve higher ESG scores.
They are also more likely to attract socially-responsible investors who may be looking for firms that prioritise sustainable business practices. Stakeholders, increasingly concerned about the long-term sustainability of their investments, and issues like climate change, corrupt or unethical corporate practices and human rights violations, are beginning to demand greater transparency, better accountability and stricter oversight of entities where they have chosen to invest. Being aware of developments in the market place and the environment will help risk professionals support their organisations’ efforts to comply with higher ESG standards.
Companies which want to beef up their ESG readiness must increase reporting transparency. This will not only help them identify areas which need improvement, but also help to build trust and confidence among shareholders and stakeholders, and generally enhance the company’s reputation. Acquiring and disseminating accurate information about organisational activities will position it as being proactive about addressing public concerns. Although transparent reporting is challenging, it enables companies to measure their ESG practices over time, and produce accurate information that will support their sustainability efforts in the long term.
Is making a company ESG-ready worthwhile? Statistics show that companies which perform strongly in the ESG stakes tend to perform better financially. Many investors are beginning to incorporate ESG criteria into their investment decision-making processes, as they see it as integral to risk management. Recognising the importance of having a positive impact on society while generating positive returns, investors are now rejecting firms with poor performances or unsustainable practices in favour of those who are committed to sustainable practices.
