Environmental, Social and Governance (ESG) reporting has risen rapidly up the agenda for businesses in recent years, driven by the growing expectation around corporate transparency and sustainable production. But what exactly is ESG, how are these factors measured, and why it is so important?
An ESG strategy defines how a company fulfils its Environmental, Social and Governance responsibilities. ESG analysis is used by the investment community to evaluate a company’s value and sustainability, and therefore its investment potential.
In more human terms, ESG represents a company’s commitment to ‘do the right thing’ for the environment and for its stakeholders, ie. its workers, customers, supply chain, shareholders, and the community. It provides valuable insights into an organisation’s ethics and represents how it values the environment, its people and society.
Given that ESG investment funds totalled £2.9 billion in the first three months of 2020, it is an area of corporate governance that companies can ill-afford to neglect. Read on to find out more about the three ESG factors, how they are measured, why they are so important in the investment process, and how OutThere HR Support Services can provide essential support to ESG performance.
What are the ESG factors?
1. Environmental – The first ESG factor is concerned with an organisation’s environmental impact and commitment to sustainable development.
Global production has a devastating impact on the environment, contributing to the climate crisis, the depletion of natural resources, waste and pollution. Since the 2014 publication of the climate change report by the IPCC, global regulations and UK government directives have emerged aimed at reducing our carbon footprint and streamlining energy consumption.
The E in ESG considers a company’s carbon footprint and its policies, practices and goals to address environmental risks and tackle climate change. Efforts to improve environmental performance may include, for example:
- Lowering carbon and other greenhouse gas emissions in line with government directives
- Improving energy and water efficiency
- Reducing waste to landfill
- Reducing reliance on non-renewable materials
- Responsibility for sustainable development throughout supply chains
2. Social – The second factor encompasses social factors, including how an organisation takes responsibility for its employees and its impact on wider society.
We are fortunate to be living in a time of greater inclusion – but it’s clear that there is still a very long road ahead. The effect of Covid has placed the S in ESG at the forefront of our minds, with staff wellbeing coming under closer scrutiny.
Companies are under more pressure than ever to prove their commitment towards their people, and wider society as a whole. In terms of ESG, an organisation’s social goals may include objectives like:
- Greater diversity in the workforce, including at executive/board level
- Better working conditions
- Addressing the gender pay gap
- Improving workplace equity and inclusivity
- Increasing customer satisfaction
- Commitment to flexible working
- Improved staff engagement and wellbeing initiatives
3. Governance – The third factor is concerned with good corporate governance, internal policies, and procedures.
There is an ever-growing demand that companies are transparent about the nature of their leadership and internal decision-making. Evidence of strong leadership, good internal procedures, policies, and practices are required as evidence that a company can make effective decisions, comply with the law, and meet the needs of its stakeholders.
An ESG strategy should include detail and clarity around corporate governance matters such as:
- Board diversity
- Executive pay
- Anti-bribery and corruption policies
- Political donations and lobbying
- Tax strategy
- Shareholder rights
Why is Environmental, Social and Governance (ESG) important for businesses?
The investor community has become all about ‘sustainable investing’ in the last ten years, seeking to sink funds into companies with a solid ESG performance in a bid to secure a more sustainable future.
The world’s largest institutional investors have their own ESG targets and are putting their money where their mouth is, seeking a social as well as a financial return.
In addition, there is growing evidence of a correlation between ESG initiatives and financial performance. It is becoming clearer that those organisations which prioritise ESG issues are generally those that are well run, profitable and represent a sustainable investment. As such, investors hold ESG data in great stead when it comes to mitigating risk and making investment decisions.
The simple answer is that organisations are, justly, being held increasingly to account for their societal responsibilities and must have a solid ESG framework to take advantage of the growth in sustainable investing.
What is an ESG policy?
An ESG policy sets out the intentions of an organisation to fulfil its environmental, social and governance responsibilities. It is the published proof of how a company is incorporating ESG investment into its operations and culture. The framework sets out ESG risks and opportunities and details in depth the practices, policies and goals to address them.
How is ESG measured?
Given that ESG issues are largely intangible, there is often confusion around ESG scores. Just how do you measure non-financial factors such as commitment to climate change or diversity targets?
ESG analysis is undertaken by independent third parties to aid investors in identifying material ESG risks. Analysts use a set of specially designed metrics to assign a numerical score against ESG metrics(for example, using a 100-point scale).
Importantly, ESG scores take into account a company’s future goals alongside its current performance, as a measure of its commitment to ESG practices. The resulting ESG ratings are widely used by capital markets to evaluate a company’s long-term value and investment potential.
Crucially, ESG performance is dependent on ESG reporting. A company may have admirable ESG strategies in place, but if the information is not clearly communicated or not in the public domain at all, then it simply can’t be translated into a score. That is why ESG reporting is fast becoming a fundamental requirement for many companies.
While it’s true that there is some way to go to ensure consistent data collection and reporting, the growing reliance on ESG analysis is serving to push important global issues up the agenda and providing a crucial incentive to organisations to uphold their responsibilities.
Why do OutThere care about ESG?
As we are all passionate HR professionals at OutThere, the S in ESG is close to our hearts. We are committed to help our clients achieve a happy, diverse and productive workforce that contributes directly towards corporate objectives.
Our services include outsourced recruitment, employee health and wellbeing, and employee engagement, which can impact very favourably on your ESG targets.
Aside from the social part of things, OutThere can help incorporate other ESG initiatives into the business, embedding them into the culture through effective communication and by way of learning and development programmes.
OutThere can help your leaders and employees demonstrate positive behaviours in line with ESG policies and show commitment towards reaching your ESG targets.
Contact OutThere about your ESG objectives
We are passionate about helping companies to realise their ESG strategy. For an informal chat or to set up a meeting, please get in touch.