ESG regulations are a crucial component of the UK Government’s approach to a ‘green industrial revolution’, to help put the economy in a stronger position to generate growth. But was is ESG and why is it relevant for your business?
The term ESG developed from a corporate social responsibility initiative launched by the United Nations in 2005, and has now grown to be a global phenomenon.
ESG stands for Environmental, Social and Governance, and refers to a set of broad criteria that evaluates how a company performs on these individual factors. They can be categorised as follows:
How a company manages natural resources, adapts to climate change, minimizes waste and pollution, utilises renewable energies, reduces greenhouse emissions, treatment of animals, carbon footprint, how they evaluate their environmental risks etc.
Relationships with employees, customers, suppliers, internal and external stakeholders, and the local community. Do they donate profits to charities, encourage employees to take volunteer days, health and safety, customer satisfaction, social responsibility, human rights diversity.
Company’s leadership, culture, behaviour and values, audits, internal controls, pay, supply chain management, board diversity, shareholder rights etc
There are different methodologies used to calculate an ESG score. Once the data is collected and analysed, the business will be given a score from 0-100. Scores over 70 are good, indicating a strong commitment to the issues. The initiative is to encourage companies to act responsibly and ethically, and have a positive impact on society and the environment.
UK firms need to be alert to the impacts of more extensive ESG regulations. Sustainability considerations are becoming essential across businesses of all sizes. Companies can no longer sweep this issue under the carpet.
The Government has already announced legislation for Britain’s largest businesses and institutions to report on climate-related risks and opportunities. The new requirements, which came into force in April 2022, meant that over 1300 of the largest UK-registered companies and financial institutions, had to disclose climate-related financial information on a mandatory basis, in line with recommendations from the Task Force on Climate-related Financial Disclosure (TCFD) aligned disclosure application guidance – GOV.UK (www.gov.uk)
In addition to this, lenders and investors are pressing for more transparency on diversity and sustainability with the heightened awareness of climate change. According to research by Capital Group, around 89% of investors factored ESG issues into their investment strategies in 2002.
This is continuing to gain momentum, so if your company is looking to borrow money from banks or other financial institutions, or apply for grants from providers for example, they will be looking not only at financial performance and risk, but they will they will also be requesting non-financial goals in the form of your ESG performance strategy and score.
Investors are becoming more “socially responsible” with ethically minded fund management the growing force. The benefits of ESG are that they can align their money with values that support positive change, and society benefits from sustainable practices to help solve the global challenges.
Investors will be demanding more information on ESG so they can make a more informed decision.
An ESG Strategy is now in the ‘must-have’ category for your company’s current and future business operations. Your strategy will need to take each of the issues and review the implications of your day-today operations and long-term commitment to the plan. Below are a few points to consider:
Not all the criteria will be relevant for your business, due to the industry, size etc, decide which issues are relevant and establish a plan of action for these specific areas.
2. Which stakeholders will be involved with ESG?
This may include investors, suppliers and customers and will shape your strategy. Make sure clear and regular communication is established with your stakeholders to keep them involved in the process.
3. How will you measure ESG progress?
What KPI will you use to ensure that your action plan is succeeding?
4. How will you report ESG performance?
What controls and processes will you put in place and who will be responsible?
Implemented properly, the principles behind ESG make a great deal of business sense. As an illustration of how much of a boost it can be to a business, a study by accounting firm Moore Global, found that companies with strong ESG principles saw their profits grow 9.1% in the three years between 2019 and 2022.
The study spanning eight major economies identified opportunities that are potentially game-changing for businesses that have faced the debilitating effects of Covid, supply chain disruption, an energy crisis, and chronic staff shortages. Companies that have embraced the ESG agenda in recent years have enjoyed a significant boost to the bottom line as well as wider strategic benefits.
Profits also rose faster for ESG adopters and there are other key business benefits as well: better customer retention and brand impact; easier access to capital and fewer issues hiring staff.
Overall, 80% of business leaders said ESG has become more important over the last three years, with Covid being the biggest driver of change.
Across the world, only 6% of companies did not have staff involved in ESG in some way.
It’s not only regulators that are setting new standards, customer expectations of transparency and corporate accountability and evidence of ethical partnerships are mounting. There is a growing population who prioritise sustainable practices, so ESG can be extremely influential.
Adopting ESG isn’t just good for society, it’s good for your business. Consequences of not adopting a ESG strategy may not only risk future financial investment but may also drive away employees, customers and partners and risk brand reputation.
ESG is here to stay! So, implementing this sooner rather than later can make all the difference for your company’s business performance. If you require any assistance with carbon foot printing/energy management/assisting with the drive to achieve net zero, please get in touch with us via email firstname.lastname@example.org or call 01527 833834 and we will be happy to assist.