What is ESG? A guide for businesses

ESG (Environmental, Social, and Governance) is a set of guidelines for assessing a company's influence on society and the environment, as well as its transparency and accountability.

According to the CBI, two-thirds of investors consider ESG aspects when investing in a company, indicating that ESG has the ability to help your business thrive while also improving the environment and community.

An ESG strategy can demonstrate that the company is lowering risks, such as modifying manufacturing methods to satisfy future environmental requirements, making it a good long-term investment.

With ESG as a crucial component for corporate growth, it is worthwhile to understand what ESG is, where your company may apply its principles and practices, and how it can help your organisation.

What is ESG?
ESG refers to a firm's environmental and societal impact, as well as the strength and transparency of its governance in terms of company leadership, CEO remuneration, audits, internal controls, and shareholder rights.

It assesses how your company incorporates environmental, social, and governance practices into its operations, as well as its business model, impact, and sustainability.

ESG comprises three components: environmental, social, and governance.

Environmental
The environmental aspect focusses on how the firm reduces its environmental impact.

It discusses the company's products/services, supply chain, and operations.

ESG enables businesses to target multiple areas of their operations and develop more sustainable, ethical practices.

Examples of environmental business activities are:

Our goal is to become a net zero company by reducing energy consumption and utilising renewable energy sources. We also strive to create greener products and services.
Transitioning to zero-waste items or ecological packaging employing biodegradable materials.
Switching to LED lighting reduces carbon emissions, encourages recycling, and reduces waste to landfills

The social side of business refers to its impact on society and workplace culture.
Organisations can positively contribute to societal fairness by investing in fair and equal opportunities and conditions for their employees, supply chain workers, and local communities.

This element is centred on equality and fairness. Examples of social and ethical corporate activities include:

The company prioritises product safety, customer data security, and preventing supply chain abuses like modern slavery and freedom of association. They also provide training and support for health, safety, and wellbeing. They promote equality in the workforce through diversity and inclusivity policies and invest in local community projects like education.

Governance
Governance refers to the decision-making, reporting, and operational aspects of running a firm. It also assesses the company's ethical behaviour and transparency with stakeholders regarding its actions. Governance is related to the environmental and social components of ESG in that it examines the transparency and decision-making processes underlying them.

To ensure ethical corporate practices, leaders and managers must be accountable for risk and performance management, avoid bribery, promote diversity in leadership teams, and disclose CEO compensation.

Ensuring strong governance in your organisation can appeal to investors and your supplier chain, and it may also help enterprises thrive.

Why should smaller businesses embrace ESG?
Even if your company is not seeking investment, using an ESG framework can help reduce risk and expenses while also enhancing reputation and recruiting new customers.

Improve the company's reputation.
Incorporating ESG into your organisation may benefit your company's reputation because it demonstrates that you have a transparent plan that focusses on helping the environment, promoting diversity and equal opportunities, and making ethical business decisions.

Lower costs.
Initiatives that decrease waste and the amount of materials utilised, such as packaging, can save money.

Reducing energy expenses, such as converting to LED lights, may help reduce overheads by lowering energy bills.

Attract workers
Some employees may want to work for organisations that are more environmentally conscientious and committed to implementing positive ESG policies.

Employees may desire to identify with organisations that promote diversity and inclusion in the workplace, as well as employee support programs for mental health and work-life balance.

Attract Customers
Some buyers may be more prepared to pay a higher price for a similar product from a more ethical brand.

According to McKinsey research, more than 70% of people would pay an additional 5% for a green product (PDF, 718KB) that satisfied the same requirements as non-green alternatives.