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By Batuli Majid, Associate at Grant Thornton
Environmental criteria assess and evaluate the risks a Company faces, and how best to mitigate these risks. The criteria include assessing the following: whether the companies’ operations emanate significant emissions to the air, whether the production process has an impact on biodiversity, and whether the Company operates in an energy-intensive sector, among many others.
Social criteria examine the company’s relationships with all stakeholders. The criteria assess the following: whether stakeholders are exposed to health and safety risks, workforce diversity, whether the Company is involved in Community Development and sponsorships, and customer privacy among many others.
Governance focuses on the compliance aspect of the organization where it covers issues like establishing a responsible purchasing policy and a code of conduct for suppliers, dealing with anti-trust issues, assigning a reference person for day-to-day ESG matters, and publishing a sustainability Report in the annual accounts of a Company, among many others.
There is a need for all Companies, whether small or large, to comply with ESG practices as they have to uphold their Corporate image and reputation by complying with sustainability practices to meet the required threshold in a meaningful way. Reputational risks put your organization at stake as it could even end up in litigation or closure if there is an unwillingness to disclose sustainability practices. This is because investors may feel like there is something you are hiding from them.
Benefits of ESG practices include but are not limited to:
Companies participating in ESG practices always have an upward trajectory and tend to perform better than companies that don’t because ESG gives them an edge that is on a higher pedestal: this can be attributed to the fact that ESG practices promote sustainability and gives investors assurance that they are in safe hands.
Surveys show that a high percentage of prospective clients are willing to spend their money on businesses that consider sustainability criteria when promoting their products and services.
ESG metrics are important to all stakeholders as they provide an itinerary of factors to put into consideration when assessing the relevance of the ESG framework. Company leaders who make efforts to improve their human resource structure, promote workforce diversity, focus on community investments, sponsorships, and product donations, and take action to ensure the health and safety of consumers, play a key role in enhancing a Company’s image and in turn enables the creation of great interpersonal relationships with stakeholders, which can eventually turn them into loyal and committed customers. You can create a brand that people believe in and can count on, time and again, giving them the ultimate satisfaction and sense of fulfillment that they need.
The imbibing of ESG practices by rational leaders increases earnings and continuous improvement of the business. This emanates from the capital injection that investors bring into the business as they believe it will add value to them. This is because ESG practices factor in key considerations like the inclusion of ESG reporting that is trending among businesses. Venture capitalists and investors are becoming highly attracted to organizations that invest in ESG and use ESG disclosures to put into the picture their sustainability practices and how they enable them to run an ethical business that is not classified as a major risk facility e.g under Seveso Directive which means legislation dealing specifically with the control of on-shore major accident hazards involving dangerous substances.
Public agitations caused by floods, seismic and other natural hazards, the pandemic, climate change, and environmental contaminations resulting from activities of companies are forcing venture capitalists to shift their focus toward sustainable businesses and seclude the ones that do not put such matters into consideration -- such as diversity issues, serious labor-related complaints, breach of health and safety legislation, non-compliance concerning marketing communications, and lack of customer privacy among many others. By providing a metric to gauge sustainability practices, leaders who reinforce ESG practices can influence a lender’s decision to capitalize on a competitor that offers a responsible purchasing policy and code of conduct for suppliers and makes financial or in-kind contributions to Society.
ESG not only enhances the financial edge of lenders and investors, but it can also streamline a business by attracting more revenue and reduction in spending. Efforts put into place, like going green or going paperless, or reducing carbon emissions, can improve a Company’s cash outflows hence resulting in more returns.
A Company should do a trend analysis to enable it to set a metric to be used when tracking its operations. Leaders should help in coming up with a roadmap on the same to track the Company’s waste treatment- originating relevant quantities of waste in the production process, use of environmentally friendly and safe raw materials, and designing products to reduce end-of-life footprints, which eventually lead to reduced overhead and overall costs. Companies that stay compliant with ESG have less exposure to fines, risks, and penalties, which results in reduced compliance costs, improved financial performance, and budget discharge.
Leaders should focus on tailoring their products and services to meet their clients’ needs and wants based on best ESG practices where clients feel that they are focusing on treating people and the environment well. For example, some products are bought in bulk and have high demand because they have no animal cruelty. While others are high in demand because they can be recycled and people prefer those compared to what alters and pollutes the environment.
Surveys show that people support businesses that result in more good than harm to the environment at large, especially now that the world is actively trying to make up for the damage that has been done to the environment and society over the years.
Smart and rational leaders help their people in following ESG best practices by ensuring that they retain their clientele and assure them that they are completely transparent and determined on seeing to it that the environmental, social, and governance aspects are prioritized, and communicating the ESG plans effectively to customers.
Businesses that are invested in ESG can easily adapt to ever-changing environments as they tend to be flexible and more aligned with their strategic plans which factor in unforeseen circumstances. The world is now heading towards ESG as it is a fairly new concept that the majority are interested in. Companies that ignore ESG policies right now are likely to find themselves in a predicament later on in their life cycle as they will have to deal with compliance issues, reputational risks, or legal risks which sprout from the lack of an ESG framework.
As much as some companies are still attached to the old-school way of doing things, ESG is taking over the world by storm. Leaders should hire a sustainability officer to see to it that the organization adopts a sustainability element. They have to factor in key areas to assess and improve their ESG slate which includes things like an increased percentage of renewable energy in the Company’s energy mix, talent retention and providing benefits to employees, taking action to ensure the health and safety of consumers, and safeguarding the organization against illegal practices.
Pursuing ESG is in a company’s interest as capital and talent increasingly flow from ESG laggards to ESG leaders, and sustainable resources get withheld or incarcerated in between. But far-sighted leaders understand that the crises we face are conjoined; they see the niche for cooperation and put into consideration the movement of a full industry ecosystem by revolutionizing ESG parameters.