ESG and You
An introduction to ESG
What is the purpose of ESG?
ESG stands for Environment, Social and Governance
Across the globe, people, states and governments have agreed that companies and corporations should not be solely profit driven. This is because sustainable ESG values, whether under Environment, Social or Governance, are now viewed as having a value that can be measured. This means that now they can be compared between different business organisations; and that will influence how they are viewed by investors.
What are the concerns that brought about ESG?
Investors today are taking a long term view due to the threat of climate change and a realisation that resources are finite. Industries reliant on fossil fuels or scarce raw materials, or that are seen as needlessly wasteful in other areas, are less attractive.
Today there is recognition of many concerns that have sometimes historically been ignored. These relate to areas such as human rights, diversity, consumer protection, employee safety and welfare, opportunities and training, the local environment and animal welfare.
What ‘structures’ actually control a company? Is there real accounting transparency, diversity and clear ethical practice? Does the structure recruit and retain the best workforce – and might it over-remunerate or compensate in order to dismiss people involved in bad practice?
Business standards and giving back
It is expected today that a company is aware of its carbon footprint. It should not abuse its workforce, but look after them to at least a reasonable level. It is also expected that a proportion of profit is ‘given back’ to help projects that benefit society and the environment. It is, of course, expected that a business is governed well – and that each ESG element is both important and interdependent.
ESG: Regulations and Reporting
There is already mandatory ESG reporting for all publicly quoted companies in the UK. In addition, private companies and limited liability partnerships with more than 500 employees and turnover greater than £500M must also report. A third of all professionally managed assets are now believed to be subject to ESG criteria.
There is a sense that in the past things that were bad for people or the planet could be hidden. ESG reporting cannot be covered by fluffy words in an end of year report. It requires concrete and verifiable figures and facts accompanied by an actual score.
Companies must already report on:
- Energy Use
- Greenhouse Gas
- Gender Pay Gap
- Modern Slavery
Who Cares About Your ESG?
A lot of organisations, employees and customers care about how a business is run, as well as its impact on people and the environment. Through social media and other channels there is also easy access to information. Doing the right thing now is far less costly than the damage (monetarily or through reputation) of being found to have acted inappropriately later.
Investors and asset managers
Regulations and mandatory reporting for ESG are set to grow. If reporting on your ESG is non-existent, or isn’t based on truth, this makes you a risk if you’re found out. There are plenty of interested parties and agencies who will fact check and look for greenwashing. On top of that, asset managers are already linking ESG ratings to profits, so not taking ESG seriously now can affect future investment, or even the removal of current investment.
The public pound
Bad press, whether based on perception or fact, spreads quickly across news and social media. Increasingly there is reluctance to support a business that doesn’t show diligence; care about its code of conduct with its employees; or ignore its effect on the environment. This is especially true (but not exclusive to) millennials and Generation Z investors and consumers. It is certainly a growing trend across society.
Your future employees
Employees want fair pay, good working conditions and opportunities to progress. They are also prefer to work for employers with similar ESG beliefs and aspirations and are less likely to stay with those that don’t. If you are recognised as setting high standards with ESG, you will encourage a larger pool of well-qualified potential employees from which to choose– and who will want to stay with you.
Statutory law and private litigation
As well as statutory reporting, governments are employing ESG regulatory measures that target businesses with ineffective ESG management. In addition, legislation in this area is expected to increase. Private individuals and public interest groups could also file against company directors and financial institutions if they perceive wrong doing in business practices. In either case there is a negative impact.