It’s a good time to be paying attention.
The business landscape is reorienting itself and you can almost hear priorities shifting toward change-readiness and the bigger picture. Companies everywhere are reviewing their strategies and re-evaluating where their resources will be invested over the next few years. Business resilience has been cemented as a top consideration.
From this perspective, incorporating sustainability is an essential focus.
ESG in a Nutshell
Environmental, Social and Governance, or ESG, is a set of criteria used to evaluate a company’s immediate standing and long-term success in three areas.
The first, Environmental, grades a company according to its quality of environmental stewardship. Not only does this evaluate your processing of raw materials and manufacturing processes, if any, but also the environmental impact of your supply chains. How does your company handle things like carbon emissions, pollution, waste disposal, resource efficiency, biodiversity, and environmental regulations?
The second, Social, evaluates the strength and integrity of relationships that a company has in terms of its social ecosystem. In Corporate Social Responsibility (CSR), matters of employee treatment, pay, and diversity are considered, along with company values, human rights, sourcing, and customer service.
Lastly, Governance is a measure of how well the company is run behind the curtain. This is where investigating parties will consider stakeholder incentives, executive compensation, bonuses, prioritized metrics of success, matters of corruption, conflicts of interest, and levels of transparency.
The ESG Investment Imperative
“Historically, performance was all [that] mattered to most investors,” notes an article at Visual Capitalist, “but going forward, considering ESG criteria ... is expected to become a default component of investment strategy as well.”
An analysis by the Global Sustainable Investment Alliance found that by 2030, 95% of all assets will incorporate ESG factors as part of their evaluation:
Looking at ESG as a whole, it’s not hard to see why investors have begun to zero in on ESG criteria as defining factors for determining the quality of an investment. How a company impacts its surroundings isn’t just about moral due diligence — it’s also a major factor for long-term bottom-line success.
A report late last year found that sustainability investing is surging, accounting for 33% of total U.S. assets under management. Another study found that “the value of global assets applying environmental, social and governance data to drive investment decisions has almost doubled over four years, and more than tripled over eight years, to $40.5 trillion in 2020.” According to Statista, global investment in ESG rose from $11.3 billion to $30.6 billion in 2018 — and that was BEFORE the pandemic came along to magnify the critical nature of these initiatives.
The more you learn about the implications of the ESG framework, the more it becomes clear that it isn’t only about how a company is currently faring in those three given areas — it’s about how well a company is setting itself up for real long-term success. It probably doesn’t need saying (but we’ll say it anyways): concerns around sustainability in business aren't going anywhere. It’s all but certain that public and investor interest in how companies conduct business is only going to grow and be placed under heavier scrutiny.
A Chance to Get Ahead
Despite the rapid rise in attention to ESG and focus on sustainability, organizations are still broadly coming up short when it comes to reporting and transparency. According to Gartner, only one in 10 investors find the ESG information they’re seeking in corporate disclosures.
“There is an enormous opportunity here for most companies to stand out better to investors simply by providing the information they are looking for,” said Stephen Adams, director in the Gartner Finance practice, in an article at Accountancy Daily. “‘ESG reporting is more widely watched than many CFOs realize ... CFOs who are not conveying an ESG story to these stakeholders are missing out.”
This may be good news in the sense that, if your company has not yet taken meaningful steps to prioritize ESG as a core business focus and business model, there’s still time to move ahead of the pack. Design policies and sustainable business practices that put these factors at the forefront. Doing so will make your business more viable in the long-term, and more attractive to both investors and customers right now. It’s not uncommon to see companies that are actually doing a good job with ESG initiatives, but failing to properly and accurately disclose this information publicly. These companies run the risk of losing out on potential ESG-focused investment dollars, not to mention alienating current shareholders and customers.
The takeaway here is that equipping your company for the future means shifting a focus away from short-term gratification and investing in transparent long-term resilience, adaptability and responsibility. Even looking at the value placed on ESG today, it doesn’t require the most extraordinary foresight to see where the industry is heading and the competitive advantage you can have.
