26 February 2024
The importance of ESG for modern businesses
ESG is no longer just a buzzword in business circles - it's a guiding principle that’s changing every aspect of the way organisations behave. But what exactly does it entail, and why should you pay attention? Let's dive into the importance of ESG and why it’s worth investing time and effort in getting it right.
What is ESG?
ESG stands for environmental, social, and governance - pillars that have become crucial for evaluating a company's sustainability and ethical standards.
The term covers a long list of factors relating to your business's impact on society and the environment, as well as its internal structure and behaviours. It's not just about profits anymore; it's about how those profits are earned and their broader implications.
The three pillars of ESG
Let’s take a closer look at the three components of ESG.
Environmental
This pillar focuses on your company's environmental footprint, including its carbon emissions, energy efficiency, resource usage, and waste management practices. Environmental strategies are often geared towards net zero carbon emissions targets, with many organisations striving to achieve this by 2050 or sooner.
Social
Social factors are all about how you interact with employees, customers, communities, and other stakeholders. This includes things like diversity and inclusion policies, labour practices, customer satisfaction, and community engagement. While it’s essential to comply with regulations, many companies are going further through corporate social responsibility programmes that create social value. For example, you might support local community projects or donate to charities related to your industry.
Governance
Governance refers to the systems and practices that guide corporate behaviour, such as board diversity, executive compensation, management structures, and decision-making processes. While good governance is a must-have for investors, it helps you fulfil your responsibilities to other stakeholders as well. For example, it makes it easier to provide employees with a clear strategic vision, and to serve customers in a way that matches your values.
Why ESG matters in today's business landscape
There is a growing number of reasons to prioritise ESG, from cutting costs to building stakeholder trust.
The role of ESG in sustainable business growth
Embracing ESG principles isn't just a moral imperative - it's also a smart business move. Companies with a robust ESG strategy and reporting are more likely to understand their strengths and areas for improvement, leading to better-informed decisions and long-term growth.
Sustainable practices also mean greater resilience in the face of sudden market changes, allowing you to weather storms with less disruption and fewer resources.
Talking of resources, operating efficiently helps to cushion the impact of rising costs for things like energy, water and raw materials, which again bolsters the bottom line.
How ESG contributes to corporate reputation
With consumers growing more conscious of the impact of their purchasing decisions, an impressive ESG record can be a powerful differentiator. Companies with strong ESG practices often enjoy greater trust and brand loyalty among customers, and 83% of consumers are willing to pay more for ethically sourced products. All of this can translate into a significant competitive advantage in the marketplace.
ESG is attractive to a whole host of other stakeholders too, including local communities, employees and investors (which we’ll cover shortly). Getting it right, therefore, means you can garner local support, acquire and retain top talent, and access vital funds all the more easily.
ESG and the investor perspective
Here’s why investors are increasingly integrating ESG factors into their decision-making processes.
How ESG affects investment decisions
Sustainable investing can deliver competitive financial returns while aligning with socially responsible investors' values. When you have strong ESG credentials, you’re viewed as less risky and more resilient over the long term, making you a more attractive investment opportunity.
The role of ESG in risk management for investors
ESG lets investors assess non-financial risks that could affect your company's performance, reputation, and shareholder value. By considering factors like energy efficiency, social impact, regulatory compliance, and corporate governance practices, investors can make more informed choices and protect their portfolios against downside risks.
ESG regulation: What you need to know
Governments and regulatory bodies around the world are ramping up efforts to hold companies accountable for their actions. Here’s what that looks like for UK businesses.
Current ESG regulations
Legislation such as the Companies Act, the Modern Slavery Act, the Equality Act, the Health and Safety at Work Act, and the Climate Change Act defines many of your obligations. For example, large UK companies are now required to submit annual reports on their energy usage and carbon emissions.
At the same time, the Government’s new Sustainability Disclosure Standards will help investors compare companies’ ESG credentials by requiring them to disclose their impact on society and the environment.
Regulation also comes in the form of voluntary certifications like ISO14001 and B Corp, which offer a prestigious stamp of approval for complying with strict criteria.
As we move towards a net zero carbon economy, regulatory pressures are only expected to grow. With so much to keep track of, it’s a good idea to have an overarching ESG strategy and reporting process that keeps all of your data centralised and easy to audit.
The impact of non-compliance with ESG regulations
Non-compliance with ESG regulations can have serious consequences for your business, including reputational damage, loss of investment, legal liabilities, and financial penalties.
Failing to address ESG risks also leaves you open to operational disruptions, supply chain failure, and other systemic threats. That’s not to mention the human cost of getting it wrong, from fatal workplace accidents to detrimental effects on whole communities.
The value of ESG reporting
Reporting helps keep your ESG strategy on track while informing its future direction.
The process of ESG reporting
ESG reporting involves collecting, analysing, and communicating relevant data. This information provides stakeholders such as investors, customers, and regulators with a clear view of your company's performance and progress over time.
While many different functions might be involved with gathering such data, finance departments are often responsible for reporting because of ESG’s financial implications. If you’re a finance professional looking to streamline your reporting and other processes, take a look at our time-saving software.
Why report on ESG?
As well as providing stakeholders with transparency, ESG reporting is a catalyst for continuous improvement. By painting a detailed picture of current performance and using this to set future targets, you can consistently make positive changes and hold your business to higher standards.
Effective reporting also lets you identify risks before they escalate, avoiding the slew of negative consequences that come with ESG oversights.
The future of ESG in business
With all of this in mind, what can you expect to see from the fast-changing world of ESG?
Predicted trends in ESG practices
Looking ahead, companies are likely to adopt ever more ambitious ESG practices as they strive to meet rising stakeholder expectations and regulatory requirements. Most large organisations now recognise that ESG goes hand in hand with long-term success; no longer a nice-to-have, it’s become integral to overall strategy and drives major decisions in every part of the business.
Key trends include more robust data analytics and reporting capabilities, and stronger collaboration across industry sectors and value chains.
How to protect for future ESG changes
To keep up with the shifting landscape of ESG, businesses must be proactive and willing to adapt. Among other things, this may involve investing in ESG training, embracing technologies that aid reporting, and fostering a culture of accountability from the top down.
Want to learn more about ESG and how to get it right in your organisation?
