ESG 101 Guide: What Business Leaders Need To Know To Get Started Now
Environmental, Social and, Governance (ESG) has become today’s business imperative. Good.Lab’s ESG 101 Guide is designed to help business leaders quickly come up to speed on the basics of ESG, understand the importance of ESG for their company, and learn how to build a world-class ESG program from the ground up.
ESG Defined
Once upon a time static annual sustainability reports were all the rage. Today ESG is essential to every company’s bottom line: executive compensation is increasingly tied to ESG metrics and investors and customers are paying close attention to real-time ESG signals. But, what is ESG?
ESG is defined as the set of criteria used to evaluate how a company performs on Environmental impact, Social responsibility, and corporate Governance. These criteria can help investors and other stakeholders evaluate the current and future performance of a company. ESG performance looks at both how a company is affected by and prepared to respond to external factors (e.g., climate change, supply chain volatility) and how a company directly impacts the communities and environments it operates in and its workers, customers, and shareholders. Common ESG topics include:
Environmental
Social
Governance
Climate & Energy Materials, Waste, & Circularity Water Toxic & Hazardous Materials Biodiversity & Land Use
Diversity, Equity, & Inclusion Human Rights & Labor Practices Health, Safety, & Wellbeing Community Relations Product Marketing & Labeling
ESG is becoming more pressing as its inherent issues gain attention in the public sphere. Companies are responding to regulatory, stakeholder, and market forces that call upon them to minimize their impact on the environment, support the communities in which they operate, and ensure good governance practices. As such, ESG factors are becoming more salient for companies and investors, and companies should strive to ensure that their activities are aligned with their core values and goals. Companies that adopt good ESG practices now benefit from a long-term, sustainable approach to business, helping them to remain competitive as the economy and industry evolves.
Why ESG Performance Matters
Evaluating ESG performance provide investors with a comprehensive view of risks and opportunities facing a business and therefore great insight into a company’s long-term value. ESG performance also helps companies to better manage their operations and comply with various regulations. Data specific to ESG performance can be used to measure and benchmark performance against competitors, providing valuable insights into a company’s competitive position. Additionally, top ESG performers are better positioned to attract new customers and investors as there is a growing demand for investment in companies that have a full picture of their operational risks, intangible assets included. Armed with more ESG information, investors can build portfolios aligned with ESG. In this paradigm, companies are held accountable for their actions and challenged to improve across ESG criteria.
The Nexus of ESG & Financial Performance
There is growing evidence that top ESG performers achieve better financial outcomes. Several studies have pointed to a correlation between ESG and financial performance, and 81% of sustainable indices outperform their peers. Companies with high ESG performance markers are likely to have lower costs of capital, higher valuations, and higher returns on investment. Not to ignore that this topic is hotly debated, importantly, companies with strong ESG performance tend to have better risk management practices and better access to capital, not to mention better employee engagement, improved customer relationships, and positive brand recognition.
When first starting out ESG leaders within a company need to decode the fast evolving and complicated landscape of ESG terminology — frameworks, standards, domains, topics, regulators — and then explore how to incorporate those principles into their operations. The following section lays out clear steps to launching a world-class ESG program.
1. ESG Program Activation
It is essential to stay informed on the latest ESG trends in what is a rapidly evolving landscape. Companies need to understand ESG regulations and how those regulations apply to their business. They also need to be clear on stakeholder expectations and how to report on related performance. As a first step in turning ESG theory into reality, companies should gain a material understanding of which ESG topics apply to their business, industry, and stakeholders and align leadership around those highest priority ESG issues.
Once an understanding of priority of ESG issues and the risk profile of the company has been determined, companies can the set their ESG targets. ESG targets should be based upon a quantified performance baseline that measures greenhouse gas emissions, supply chain emissions, product lifecycle emissions, and other quantifiable metrics. Many companies are required to report on performance data for any publicly stated ESG targets and should therefore set goals with precision and calibrate them to their ambition.
A strong understanding of climate risks affecting the business is also essential to a comprehensive ESG program. Assessing climate risks can help businesses address potential issues before they become costly or damaging. While risks and opportunities related to climate change have been and will be of top importance in recent years, water management and biodiversity round out some of the most pressing ESG topics for companies to focus on in the environmental domain. In the social domain, more companies are setting targets around diversity, equity, and inclusion (DE&I) initiatives, and in the realm of governance, business ethics and transparency play an essential role in helping companies protect themselves from reputational or legal damage. Good.Lab’s ESG software enables companies to quickly produce an ESG performance baseline with powerful visualizations to track performance and assurance-ready data exports for internal and external inquiries on ESG performance.
3. ESG Performance Improvement
In the final – and ongoing – phase of the ESG journey, ESG performance data should be analyzed to serve as the basis for how a company is progressing toward its stated targets. Companies that have mandated disclosure requirements will need to provide detailed performance improvement plans along with their ESG data. Continuous monitoring and measurement form the backbone of a successful ESG program. Rather than be considered a simple box checking exercise, ESG performance data reporting in the form of an ESG Scorecard can provide leadership with a timely snapshot of ESG performance that can be monitored and analyzed for continuous improvement.
The current ESG software landscape is highly varied, with a number of solutions available to companies of all sizes. Generally speaking, these solutions can be divided into two main categories: comprehensive solutions that deliver an end-to-end suite of ESG solutions and specialized solutions that focus on specific areas of ESG.
Disclaimer: Good.Lab does not provide tax, legal, or accounting advice through this website. Our goal is to provide timely, research-informed material prepared by subject-matter experts and is for informational purposes only. All external references are linked directly in the text to trusted third-party sources.
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