4 Reasons Your Company Needs an Environmental, Social and Governance (ESG) Strategy

4 Reasons Your Company Needs an Environmental, Social and Governance (ESG) Strategy

December 07, 2021

In recent years, the concept of environmental, social and governance (ESG) strategy has steadily gained traction and become a corporate buzzword. Because of climate change, social justice movements and investor pressure, ESG has moved to the forefront of concerns for companies looking to be more cognizant of their impact and influence on the environment, social causes and government policies.

With the additional fallout from the COVID-19 pandemic, which highlighted how unprepared our global economy is for catastrophic change, investors and businesses alike have catapulted ESG from a fringe issue to one that requires immediate action. Today, implementing an ESG strategy is crucial to position your company for future success.

What Is ESG Strategy?

An ESG strategy prioritizes sustainable and responsible business practices in three different areas: environmental, social and governance. Implementing ESG standards ensures ethical and sustainable operations within your organization and provides measurable data to clients and investors looking to gain transparency from the companies they do business with.

The CFA Institute breaks down ESG into the following criteria:

  • Environmental - Examines conservation of the natural world (e.g., carbon emissions, water usage, etc.)
  • Social - Considers people and relationships (i.e., how you treat your workers, customers and communities)
  • Governance - Looks at standards for running a company (e.g., equitable board representation, anti-corruption policies, political contributions)
The building blocks of an ESG strategy include:
  • Understanding the ESG key performance indicators (KPIs) that are relevant to your business
  • Tracking data related to these KPIs and reporting what you find
  • Analyzing your performance and setting measurable and actionable goals

Why Is ESG Important to Your Organization?

Employing an ESG strategy has both financial and reputational benefits for your organization. If you have yet to adopt an ESG framework, consider these four reasons for getting started.

1. Investors are asking for it.

Investors are becoming more and more focused on the long-term risk to economic growth posed by companies overlooking issues like climate change and social inequality. Because of this, they have identified companies with ESG strategies as more valuable assets in the long run, and are increasingly requesting ESG disclosures from the companies they invest in.

Larry Fink, CEO of BlackRock, the world’s largest asset management company, said in a 2021 letter to CEOs that “climate risk is an investment risk.” He then asked all companies that BlackRock has invested in to “disclose a plan for how their business model will be compatible with a net zero economy.” Because better sustainability disclosures are in companies’ as well as investors’ best interests, Fink urged business leaders to move quickly to issue them rather than waiting for regulators to mandate them.

Investors’ growing focus on ESG is also evident in the flow of investment dollars. Total U.S. assets under management (AUM) using sustainable investment strategies have increased by 25-fold since 1995, according to the US SIF Foundation. According to Bloomberg, the global AUM invested based on ESG metrics is expected to hit $53 trillion out of $140.5 trillion total AUM in 2025. Although Europe has historically led the charge on ESG investing, the U.S. is quickly catching up and is expected to be the top ESG investor as soon as 2022.

2. ESG is good for business.

Many organizations are hesitant to implement an ESG strategy because they are worried about the return on their investment. However, sustainability is good for the bottom line. According to the Harvard Business Review, an ESG strategy has six main positive impacts on a business:

Drives a competitive advantage through stakeholder engagement

Through regular dialogue with stakeholders, a company with a sustainability agenda is better positioned to anticipate and react to economic, social, environmental and regulatory changes as they arise.

Improves risk management

In a 2016 study on climate change and corporations, 72% of the 4000 respondents said that climate change presents risks that could significantly impact their operations. Climate change has the potential to alter growing seasons, for example, subsequently decreasing crop yields and disrupting production processes. Water resources, once plentiful and inexpensive, are now increasingly depleting. Global supply chains, too, are vulnerable to disruptions and revenue loss from increasingly frequent climate disasters.

Implementing an ESG strategy is a way to help mitigate these threats. By assessing risks ahead of time and planning for scenarios before they occur, ESG can help make businesses resilient in the face of these challenges.

Fosters innovation

Reframing business practices and products to meet environmental or social needs opens a window of opportunity to rethink stagnant processes and reimagine possibilities. It allows creative thinking to flow and encourages employees to rise to the occasion and do their part to make the world a more sustainable, efficient and equitable place to do business.

Improves financial performance

It is a myth that businesses need to choose between the environment and profit. In fact, asset management firm Arabesque and the University of Oxford reviewed academic literature on sustainability and corporate performance and found that, out of 200 studies analyzed, 90% concluded that good ESG standards lower the cost of capital, 88% showed that good ESG practices result in better operational performance and 80% found that stock price performance is positively correlated with good sustainability practices.

Additionally, according to McKinsey, the value at stake for companies who fail to pursue sustainability could be as much as 70% of earnings before interest, taxes, depreciation and amortization.

Builds customer loyalty

Adhering to ESG standards is also a critical component of meeting your client needs. The Harvard Business Review noted that 82% of customers in emerging markets and 42% in developed markets believe they have “a responsibility to purchase products that are good for the environment and society.” Clients have expanded their interests to the values behind the brand, and companies need to pivot to meet those emerging interests.

Attracts and engages employees

Top recruits are also focused on working for companies that share their values, and they want their prospective employers to care about ESG principles. Companies that include sustainability in their core business strategy treat employees like critical stakeholders, fostering a culture of employee loyalty where they feel like they are serving a greater purpose.

This attention to ESG also helps employee retention. Firms that place greater value on corporate responsibility can reduce average turnover by up to 50%, according to the Harvard Business Review, saving replacement costs of as much as 200% of annual salary for each retained employee.

3. Government and regulatory bodies will be asking for it .

The execution of climate disclosure regulations is a “when,” not an “if.” The U.S. Securities and Exchange Commission is expected to adopt ESG reporting frameworks and propose new ESG disclosures by the end of 2021. According to Bloomberg, final rules requiring the disclosures could then follow in 2022. Additionally, some of the top ESG reporting frameworks announced in November 2021 at the COP26 United Nations Climate Change Conference in Glasgow that they will be uniting to create an International Sustainability Standards Board and, by the end of 2022, the world will have a unified reporting framework on ESG.

By developing an ESG strategy now, before it becomes compulsory, you can strengthen your brand reputation as a market leader in ESG strategy, align your business model to capitalize on the demand for sustainability and put your organization at a competitive advantage against companies who have yet to adapt. Taking a proactive approach to ESG strategy will also minimize the disruptive impact future mandates have on your organization.

4. ESG reminds you to think of your business in 100 years, not just next quarter.

In the business world, there is constant pressure to produce short-term returns. But expanding your focus to include long-term sustainability is no longer an option, it’s a necessity.

What effect does your business have on the environment? Can the earth supply the number of resources required to fuel your growth in perpetuity? Do you want your business to still be around and be an asset for your children, your grandchildren and their grandchildren? Companies need to ask themselves these questions as they consider their global impact and sustainability.

Take Action

The world is moving faster than ever, and ESG will inevitably become a focal point for your business. By proactively developing an ESG strategy now, you can protect your bottom line while setting yourself up for a successful and sustainable future.

Armanino can provide an ESG readiness assessment and help you develop ESG strategies and services for your organization. To learn more, contact our ESG experts.

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