ESG: What Is It & Why Is It Important?
Our world is rapidly changing. The way corporations have existed and operated in the past is now changing. External and internal pressures are shaping the way corporations do business and how they affect the world around them, both positively and negatively. Out of this transformation come initiatives like Environmental, Social, and Governance (ESG).
This article aims to clarify what exactly ESG is, why it’s important, and how companies are undergoing the transformation toward being environmentally, socially, and governmentally ethical and compliant.
Expanding the abbreviation ESG does very little to help us understand what exactly it is. It’s a stakeholder-focused way of doing business that emphasizes how companies affect and influence the world around them.
More and more, companies are expected to follow some form of ESG initiative by the public and stakeholders are demanding it to make ethical yet profitable decisions.
- The “E” stands for Environmental, how the natural world is affected.
- The “S” stands for Social, how a corporation meshes within the fabric of our society.
- The “G” stands for Governance, how an organization is led, run, and operated.
Through ESG initiatives, employees and citizens who demand better from corporations expect a transparent way to make decisions surrounding a company’s ethics, operations, and profitability. Gone are the days when the bottom line was the penultimate metric. Proponents of ESG envision a world where corporations aren’t at odds with the best interests of the people and the planet.
For many people, the term sustainability refers to more than just preserving the planet. It’s about making corporations into entities that can achieve more than sheer bottom line growth. ESG is also more than just a way for consumers to gauge how ethical or socially responsible a company is; It’s a way to gauge financial risk and opportunity.
We can view ESG as a kind of reporting to ensure transparency into what really matters for us. This report aims to provide simple documentation of the risks and opportunities that are present in a company’s operations that go deeper than financial health. Using ESG ratings accomplishes this for various stakeholders. These three aspects of a company are now being watched closely as the public has some serious questions:
- How are organizations managing risk?
- What opportunities are organizations capitalizing on surrounding environmental, social, and governance?
- How are my favorite companies operating?
What does ESG really mean?
Environmental: This refers to sustainable practices to preserve our planet. This aspect examines how climate change, carbon emissions, water and air pollution, greenhouse gas emissions, and using sustainable energy are being factored into the way a business operates. It also looks at how a company is preparing to deal with the business challenges as well as the threats they might face.
Social: This refers to how a company is factoring in its interaction with humanity as a whole. This includes Diversity, Equity, and Inclusion initiatives, employee rights, mental health best practices, customer success, privacy issues, and how companies are improving the communities in which they operate.
Governance: This refers to the very fundamental operation of the organization itself. This includes how executives are compensated, how the company hires, who the board of directors is composed of, how an organization collaborates with political parties, as well as the transparency into potential fraud, corruption, or human rights violations.
What is the difference between ESG and CSR?
Between CSR and ESG, there has been a big push to accomplish sustainability, ethics, and maintain a certain level of virtuosity in business. But what’s the difference between the two? Both are a set of requirements used to measure sustainability. But they are different.
What is CSR? CSR refers to Corporate Social Responsibility. This is a method for documenting what initiatives corporations are running toward sustainability: community impact, best practices in labor, charitable missions, and carbon footprint. It’s an important part of managing brand reputation in an era where companies are scrutinized more heavily for their practices. It is, however, a way of presenting their reputation through transparency, not a reporting function.
ESG is a very quantifiable framework to help investors and consumers understand how a company is operating. The ESG framework provides goals that companies can align with and aim at. CSR, on the other hand, has a somewhat vaguer definition. CSR is, at times, an internal method of conveying the ethics and responsibilities of a company to internal stakeholders like employees. Some companies use CSR to showcase and raise awareness for companies' initiatives. In essence, CSR acts as the internal compass for how a business can operate with good morals and ethics. While ESG may fundamentally accomplish the same end result for a corporation, its method is different. ESG remains much more of a way for external elements to evaluate and monitor a company’s efforts toward a better footprint on society. CSR can also be viewed as an underlying philosophy of how a business model is executed.
At the end of the day, ESG is a way for investors to determine if a company is worth investing in during these dynamic times when environmental and social impact play a huge part in how a company is perceived. It’s common now for companies with their eyes on creating a positive social and environmental impact to offer a higher return for investors. Because ESG is a framework used to measure what eventually resembles corporate social responsibility and it does so in very quantifiable ways, it will likely become the primary indicator of a corporation operating in the most sustainable and conscious manner.
How is ESG scored?
As companies’ ESG scores are a measurement of how they are performing in various verticals, it stands to reason that a uniform numerical system would be in place to effectively “keep score”. But how does that look in practice? One thing to note is that this measurement is not yet perfectly airtight. Just because a company has a high ESG score doesn’t make them a perfectly performing company.
For now, ESG scores are focused on a company’s exposure to risk and opportunity as well as its current and past performance. Good ESG scores show investors that a company is making good decisions to create a positive impact as well as protect itself from future threats in a rapidly changing world. Bad ESG scores show investors that the investment may not be aligned with their goals and values.
How are the scores calculated? External agencies use their own formulas to calculate how well or poorly companies are following ESG best practices.
Why should companies engage in ESG?
More companies are focusing on the triple bottom line. This is more common now than ever before. This trend will likely see companies face much scrutiny if this model isn’t at the forefront of how they do business.
One of the primary focuses of ESG is on dealing with the looming threat of climate change. The threat of climate change is quickening the pace at which we transition to more sustainable ways of running corporations. ESG is helping companies re-evaluate their organizations and putting them under the microscope, which will ultimately lead to better organizations.
Social change is happening. Issues like diversity and workplace conditions are serious considerations for many investors and consumers alike. The benefits of companies that are run in ways that check all of the social boxes are becoming well-known. How a company is organized and operated is just as important as what the company does today. It’s not just investors who are looking for high ESG scores before they take a risk. It’s also customers, employees, and suppliers.
All of this adds up to one thing and it’s bigger than an ethics issue: a lack of a thoughtful and honest ESG strategy will hurt your company in the long run.
How can companies build an ESG strategy?
To engage in ESG strategies that are going to give you a solid score while creating a more sustainable business operation, there are a few things you’ll have to do. First, you’ll need to get all decision-makers on board. An ESG overhaul is no easy feat and it will require resources and commitments. Next, you’ll want to see where you currently are. Check your current ESG score through one of the scoring agencies. These reports can be very valuable in determining where you are in order to figure out where you need to go.
After you figure out a baseline score, you can choose to set those findings against a framework. A framework is just what it sounds like. It’s a foundation used to measure your reporting against similar companies. Lastly, with your framework and baseline in place, you can better compare against your peers and begin to optimize your ESG rating through best practices. Assuming you have or will soon develop a high ESG score, you can begin to mesh this asset into the framework of your company culture. With a good ESG rating, companies are able to attract quality investors and consumers who align with their values.
Good ESG scores that reflect a low risk for investors and consumers can be viewed online. Acer, for example, scored a 14.3 ESG Risk Rating on Sustainalytics (brought to us by MorningStar).
To learn more about Sustainalytics ESG ratings, watch this video:
Acer engages in ongoing review and promotion of important sustainability issues and strives to incorporate sustainable development policies into daily operations.
Acer launched initiatives like Acer Vero, a sustainable product line, and Acer Education, education initiatives for greater social good, to deeply integrate ESG into their overall business model to boost ESG performance. To read Acer’s full ESG Mission Statement, head here.
*The opinions reflected in this article are the sole opinions of the author and do not reflect any official positions or claims by Acer Inc.
About Alex Clark: Alex is a contributing writer for Acer. Alex is a Texas-based writer and B2B email marketing strategist specializing in helping technology brands connect to their customers. He has lived all over Asia and has consulted with business clients in numerous industries to grow their brands.