The ABCs of ESG

A business without clear ESG credentials stands to lose its competitive edge in today’s market. We’ve taken a look at the steps your organisation can take to ensure it is making ESG positive decisions.

What is ESG?

Environmental, Social and Governance (ESG) frameworks are the three core principles that organisations are increasingly expected to report on. ESG is generally considered to be the non-financial sustainability factors associated with a business’ day-to-day operations, such as company culture, environmental impact, and social inclusion and diversity.

Why is it important?

The business landscape has evolved drastically over the years as society’s core social and environmental values have progressed. Global attitudes have adjusted to modern reformist movements which champion social inclusion, strong ethics, and climate considerations. In simple terms, organisations falling short of ESG credentials are facing harsher scrutiny and are likely to experience negative business impacts, including a tainted public image, loss of business, or difficulty attracting and keeping talent.

E for Environment

The E in ESG is perhaps the most widely understood of the three parts. It encompasses all the ways a business can impact the environment, and the practices put in place to minimise or eliminate harm.

Measuring greenhouse gas emissions is a common practice in ESG reporting, but it is important not to stop there. Climate change is just one of many environmental factors businesses must consider – other examples include waste management, energy and water consumption, sustainable materials and more.

S for Social

The social category refers to how an organisation manages their employee relationships, external relationships, and their overall social impact. High employee retention is an example of a positive social marker.

Recently, wider social narratives have been incorporated into a company’s social strategy. For example, how a company weighs in on far-reaching issues such as race, sexuality and gender-based issues is an important factor influencing how a company is perceived.  

G for Governance

Governance covers all the ways in which a business manages itself, such as ownership structure, stakeholder engagement, board diversity, and corporate behaviour in the market. Effective governance should be seen as the fundamental building block that underpins all ESG activity by ensuring transparency, accountability and sound decision-making.

“A solid governance framework is a pre-requisite for success in the other aspects of ESG. Getting governance right should be the starting point for the directors of all kinds of organisations”

Dr Roger Barker, director of policy and governance, Institute of Directors

Materiality

When creating an ESG strategy, businesses generally go through a process known as Materiality Assessment. This is an exercise to identify specific ESG issues that materially affect the business, and that the business can materially influence. It is often conducted with the help of both internal and external stakeholders.

The purpose of a Materiality Assessment is to help businesses to narrow down their focus to a more manageable set of ESG priorities. For example, one company may decide that greenhouse gas emissions, the Living Wage and board diversity are its main priorities for the next year, whereas another might find that deforestation, training & development and modern slavery in the supply chain are more material to its individual circumstances. 

You can find the Materiality Assessments of many multinational companies in their annual sustainability reports.