The idea of responsible investing started in the 18th century as religious groups began discouraging investments in weapons, liquor and tobacco. The scope of responsible investing today has shifted to a focus on ESG, or environmental, social and governance factors. Socially conscious investors use ESG to evaluate how far along companies are with their sustainability efforts as a screen before deciding to make an investment.
ESG puts sustainability at the forefront of decision-making. Environmental, social and governance factors are considered equally important as traditional financial metrics in terms of the business' decisions.
Environmental: This relates to the company’s use of natural resources and commitment to environmental conservation, recycling, and sustainability. Environmental factors also encompass the company’s evaluation of its carbon footprint and energy use.
Social: This factor deals with the company’s relationship with its employees, stakeholders and vendors. The organization’s take on diversity encompasses inclusion efforts from the boardroom to entry-level employees, from organizing wellness programs to ensuring a work environment where employees are treated fairly.
Governance: This company's leadership guides the business toward creating a positive impact. Initiatives are in place that address equity in compensation, and integrity and transparency is established with stakeholders inside and outside the company. Diversity and inclusion are a given in the composition of the board and among company executives,
COVID-19: Case for ESG
In the post-COVID-19 world, the importance of tenets of ESG have come to the fore.
The first tenet of ESG, environmental, has manifested in reduced air pollution and low carbon emissions due to travel restrictions. This reprieve has been had a positive effect on biodiversity, giving wildlife space to thrive and allowing them to reclaim some once-contested habitats.
From a social perspective, the pandemic has given rise to concerns about employee well-being and productivity while working from home. The social pillar of ESG also represents the test of the resilience of strained business supply chains — highlighting the need to transform them not only nationally but globally.
In terms of governance, the pandemic has illuminated the importance for companies to have agile board governance. The prolonged crisis has triggered a need for quick adaption to ongoing changes among leaders rather than a staid approach.
The small business’ advantage
ESG has nothing to do with a company's size, resources or rate of growth. So even small businesses must work to integrate ESG objectives into their operations.
But small companies will need to customize ESG to suit their particular businesses. Doing so will open a realm of opportunities — brand enhancement, a streamlined business model, cost-efficiency and the ability to attract talented employees amd socially conscious customers and investors.
Given the advantage of being a local business, small firms can often offer a compelling story consumers can identify with, and adopting an ESG agenda makes it even better. Small businesses could improve their financials and lower their carbon footprint with simple changes like using digital receipts, switching to solar power, using recycled materials and improving waste management.
Also, small businesses with a clear sustainability objective are more likely to attract sustainability-oriented investors. So adopting ESG initiatives helps small businesses gain a competitive advantage.
With millennials and Gen Z most willing to associate themselves with companies committed to high values and strong ethics, ESG must be woven into the company’s strategy and vision to succeed at recruiting talent from these groups.
Adopting ESG: The first steps and beyond
Small companies must begin with interpreting ESG broadly and determining how it can be customized to suit their businesses.
While developing the ESG strategy, the first step should be to identify one or more focus areas, and then clarify how those areas can be made more efficient. Next, ensure 360-degree engagement involving all of the business’ stakeholders, including the board, management, executives, staff, investors and consumers.
While moving to the implementation of strategy, all three components of ESG — environmental, social and governance— must be addressed, embedding them into the company vision, mission, values and strategy. Also, the proper allocation of assets, people and time must be established for the strategy to be in motion.
Though optional for small companies, a public disclosure of the ESG purpose statement is recommended. This will keep investors, customers and competitors informed and encourage the firm to keep its commitment.
Finally, have metrics in place to gauge the effectiveness of the ESG strategy. Improvise if desired results are not achieved. Also, in the rapidly changing world, be ready to change so as to stay current with new ESG trends.
ESG has gone mainstream. Companies must respond accordingly by adopting ESG practices to prioritize sustainability. Investors today and in rising generations are increasingly concerned with making impactful investment decisions, meaning ESG tenets can no longer be ignored by businesses.