How does ESG create value?
Environmental, social and governance (ESG) issues have been a focal point for a while. However, since reducing carbon emissions in order to reach carbon net zero was first introduced as part of the Paris Agreement in November 2016, the focus on ESG in the work that businesses, corporations and other organisations do has ramped up.
The UK government set a target for the country to be at net zero by 2050. This means that we’re on the clock when it comes to managing our green credentials and reviewing how close we are to achieving the net zero goal.
Many companies creating ESG strategies or investing in ESG as part of their everyday operations, so it’s clear we’re taking steps in the right direction. But what exactly is ESG, and how does it create value?
What is ESG?
Environmental, social, and governance (ESG) is a business’ impact on the environment and society. It is also how transparent its governance is, including how management is paid and shareholder rights.
Businesses make decisions that account for their impact on these factors. A business will create an ESG strategy, and this can include anything from implementing change across the business to employing a wider scope by actively investing in things that preserve the environment. For example, in order to be in line with future environmental legislation, a strategy might look at revising processes to reduce unnecessary waste.
Social considerations could involve employment issues, such as inequality and discrimination, along with human rights issues. In this case, companies should seek legal guidance where necessary. Experts in corporate law can help to steer companies towards developing how these considerations are made across the organisation.
In ESG, governance could then refer to how both public and private institutions are organised and run.
What is ESG investing?
As well as making a company more socially and environmentally aware, ESG can be used to screen potential investments. ESG investing is where investments that are being made by businesses are driven not only by the financial aspect, but by environmental, social, and governance factors too.
By incorporating ESG in the investing process, the focus is on business’ impact on people and the environment as much as it is on potential profits.
What makes ESG valuable?
There are several ways that ESG adds value to a business:
– Competitive advantage
More and more investors are looking at how companies are adapting their processes to account for the wider environment. Investing with a conscience is popular, especially among younger people in business. So, for companies that are introducing ESG strategies, they can gain the edge over their competitors.
– Attracts investments
Similarly, adopting ESG increases a company’s chances of attracting investors that are looking at a more socially and environmentally aware way of doing business.
– Enhanced reputation
ESG is good for a business’ reputation and can attract new talent.