What is ESG and why does it matter?

Investors have long considered environmental, social and governance issues when deciding where to put their money. Now ESG is growing in importance for employees, customers and company culture.

CULTURE | 6 MINUTE READ

ESG (environmental, social and governance) policy began to feature in the strategy of successful businesses in the 1960s. Investors started to pay attention to the activities of the companies they were engaged with - and to pull out of companies if they thought those activities were undesirable or irresponsible.

Since the 2010s, and exacerbated by the global pandemic, investors have been using their influence on a much greater scale. They’re considering ESG data in areas like carbon footprint, diversity and inclusion, and compliance with global sustainability guidelines in deciding where to invest. Companies that are resilient to future shocks and are committed to behaving responsibly are increasingly seen as better bets.

But it’s not just investors. Employees now have ESG much higher up on their agendas. The upheaval of the pandemic and the rise in hybrid working has put a new focus on finding purpose in work, which ties in neatly with ESG issues. Nearly two in five employees responding to a survey by Robert Half said they’d look for a new job if their employer wasn’t doing enough on ESG issues. And ESG is particularly important for younger people, with 22% of 18-34-year-olds putting corporate values above salary.

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What is ESG?

What is ESG?

ESG is made up of three elements:

The environment

The impact of an organization on the environment includes its policy on reducing carbon emissions, typically measured in line with the UN’s Paris Agreement. This commits countries who’ve signed the agreement to progress towards carbon neutrality by 2050. In line with these commitments, business leaders have considerable responsibility to reduce the environmental impact of their organizations.

Other environmental concerns include energy and water use, recycling and waste management, eliminating plastics, reducing the effect of hazardous materials in manufacturing and paying attention to conservation and biodiversity issues.

Social policy

The way an organization manages its relationships with its employees, society and the wider community is increasingly important to investors and customers. And it’s increasingly becoming a top priority for current and future employees.

But remote and hybrid working have changed the nature of the challenges. Businesses now need to manage the social impact of their operations, including employee wellbeing and diversity and inclusion, both inside and outside the physical workspace. And while hybrid working has brought many ESG upsides – less pollution from commuting and breaking down barriers to employment, for example – leaders need to be on the lookout for downsides too. These can include disconnection from local communities and employee isolation.

Governance

Fair employment practices are part of maintaining and improving good corporate governance. Also vital are paying attention to supply chains and prioritizing suppliers and partner companies which have strong ethical values.

9 reasons to focus on ESG in your workplace

9 reasons to focus on ESG in your workplace

The benefits of putting ESG at the forefront in the workplace of the future can be seen in several key areas:

1. More engaged workers

Companies with higher ESG scores report higher levels of satisfaction among their employees. A study by Marsh & McLennan Advantage shows that businesses with highly satisfied employees score 14% higher on ESG performance. These employers tend to be more diverse and have lower carbon emissions. They’re also more emotionally intelligent, making more of an effort to understand employee feelings.

2. Higher profitability

According to the London School of Economics, firms with higher levels of employee satisfaction boast returns which are between 2% and 4% higher than businesses with lower employee scores. And when the Stern Center for Sustainable Business compared 1000 studies, it found a positive relationship between ESG and financial performance in 58% of them.

3. Enhanced reputation

With the increased media profile of environmental and social issues, and the spread of online activism, businesses which don’t demonstrate their ESG credentials may face negative publicity and reputational damage. But it’s vital these credentials are real. Companies seen as ‘greenwashing’ – making fake or misleading claims about their ESG policy or practices – will also find their public image tarnished.

4. Aligning with regulations

There’s a weight of legislation giving ESG in the workplace a legal foundation. This includes regulations on equality, human rights and anti-bribery. Proactively focusing on compliance can lead to savings in terms of regulatory intervention, retrofitting policy, monitoring and expensive court proceedings.

5. Attracting customers

Customers are increasingly demanding better ESG practices from the companies they buy from – and businesses that don’t offer them may struggle to attract customers. In one customer survey, 62% said that paying staff fairly, caring for the environment and contributing to the community are more important to them now when considering a purchase. And 52% said they’re more likely to shop with retailers that use ethical suppliers or supply chains.

6. Attracting investors

A global survey by McKinsey suggests that 83% of business leaders and investment professionals believe that ESG programs will contribute more shareholder value going forward. Investors are increasingly seeing companies with poor ESG strategy as being less resilient and representing greater financial risk.

7. Attracting talent

According to a study by the New York Times, a majority of MBA students would accept a lower salary to work for an environmentally responsible company. Robert Half found that 53% of people surveyed wouldn’t work for a company they thought was unethical. And as many as 95% of office workers believe it’s important or essential that the companies their employer does business with are also diverse, sustainable and transparent.

By 2029, Gen Z and Millennials will make up 72% of the world’s workforce. These employees of the future place greater importance on environmental and social concerns than their predecessors, expecting employers to act on their impact on the environment, address social issues and show a commitment to ethical action.

When it comes to attracting these vital younger employees, companies with the most attractive image to young professionals and students have 25% higher ESG scores than average.

8. Keeping valued employees

Not only does a strong ESG policy improve your organization’s chances of attracting top talent, it can help you keep it, potentially stemming the tide of the Great Resignation. Employee satisfaction is increasingly linked with ESG, and satisfied employees, in turn, are linked with greater productivity and staying in roles for longer.

9. Providing a sense of purpose

The pandemic led to many people looking for something more meaningful from their work. Effective ESG strategy can help recruit people with those higher goals and expectations. However, those employees will continue to seek a sense of personal involvement with the companies they work for. And organizations may need to foster wellbeing, as well as offering incentives which reach beyond pay and benefits packages.

How to implement an improved ESG strategy

How to implement an improved ESG strategy

No matter where an organization is on its ESG journey, there are a few key things it can do to implement or improve its strategy.

  • Determine clear objectives and goals

  • Assess your current practices and involve employees in looking at individual elements and how they might be established or improved

  • Remember to include assessment of supply chain partners’ ESG as well

  • Develop a framework for improvement and monitoring

  • Regularly review and report progress, communicating with employees and stakeholders at all levels

  • Communicate the strategy clearly, internally and externally

  • Guard against greenwashing – it’s crucial that policies and promises are real and achievable

  • Involve all employees in individual and collective initiatives, fostering a spirit of teamwork

  • Implement social and environmental responsibility mentoring and training programs

  • Ask new and existing employees for their suggestions. As more and more Gen Z and Millennials join the team, they will bring new insights and ideas.

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