ESG 101: What Business Leaders Need To Know To Get Started

ESG Basics

Environmental, Social and, Governance (ESG) has become today’s business imperative.  Good.Lab’s ESG 101 Guide is designed to help business leaders quickly understand the basics of ESG, the importance of ESG for your company, and how to build a world-class ESG program.

What is ESG

Five years ago, a static annual sustainability report may have been enough. Today, ESG is essential to every company’s bottom line: executive compensation is increasingly tied to these metrics and your investors and customers are paying closer attention than ever to real-time ESG signals, but what constitutes ESG?

ESG refers to the three central factors in measuring the sustainability and societal impact of a company or business.These criteria help investors and other stakeholders to assess the current and future intangible asset performance of your company and are considered essential data by the investment community. ESG has also been translated into accounting standards and frameworks that can help businesses and their stakeholders understand and evaluate a company’s impact. 

ESG is both about the impact of externalities on businesses – how outside factors affect a company, and about the impact of a business on the environments and communities it operates in – how the internal factors of a company have external impacts. For example, a company needs to consider both the impact of its internal business operations on the natural world and how it plans to address external environmental risks. ESG can be broken down into individual topics, sometimes also called issues or domains that matter to individuals’ businesses and its stakeholders.

Common ESG topics:

Climate & Energy
Materials, Waste, & Circularity
Toxic & Hazardous Materials
Biodiversity & Land Use
Diversity, Equity, & Inclusion
Human Rights & Labor Practices 
Health, Safety, & Wellbeing
Community Relations
Product Marketing & Labeling
Corporate Accountability
Risk Management
Supplier Performance Management
Ethics & Code of Conduct
Data Security & Customer Privacy
Policy & Advocacy

Why ESG performance matters for all businesses today

ESG performance is important to businesses today because it can provide a comprehensive view of risks and opportunities and insight into a company’s long-term value. Further, it can help to identify areas where they can reduce their environmental impact, increase their social responsibility, and strengthen their corporate governance. ESG performance also helps companies to better manage their operations and comply with various international regulations. Data specific to ESG performance can be used to help measure and benchmark performance against competitors, providing valuable insights into a company’s competitive position.

Additionally, an increased focus on ESG can help companies 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. With more information, investors can build portfolios aligned with their values and push for change. Inthis paradigm, companies are held more accountable for their actions and challenged to improve

The drivers of ESG integration in business today

The drivers of ESG integration in business can be divided into three categories: regulatory, stakeholder, and market forces. Regulatory forces include laws and regulations that require or incentivize businesses to adopt ESG practices. Stakeholder forces include pressure from customers, employees, and other stakeholders for businesses to adopt ESG practices. Market forces include the growing demand for sustainable investments and the increasing availability of data on ESG performance. All of these forces are helping to drive the growing integration of ESG best practices into businesses.

The impact of ESG on the financial performance of companies

There is growing evidence that companies managing their ESG issues well achieve better financial outcomes. Several studies have pointed to a tangible link between ESG and financial performance and 81% of sustainable indices are outperforming their peer benchmarks as companies with high ESG performance markers have been found to have lower costs of capital, higher valuations, and higher returns on investment.

While outperformance is hotly debated, companies with strong ESG performance tend to have better risk management and increased access to capital, as well as increased employee engagement, improved customer relationships, and increased brand recognition. Taken together, these factors improve the overall financial performance of companies.

The basics of getting started with ESG 

Ideally, businesses should approach ESG with a focus on sustainability and long-term value creation. The following section lays out six key steps to launching a world-class ESG program.

1. Know the landscape and prepare for the changing scenarios

The first step is to gather a good understanding of the ESG regulations and reporting standards landscape. Businesses should stay informed about the latest ESG trends and regulations, and actively engage with stakeholders to ensure that their practices are aligned with their values. Good.Lab’s solutions are designed to help companies quickly come up to speed and focus on the most necessary and impactful areas of ESG. Read more about the current reporting standards landscape and what we expect to see in 2023.

2. Work out a governance structure for ESG

As a second step, organizations need to decide who should be the leader of ESG in the company as well as the team to execute them. Historically, ESG has been led by multiple roles. Who leads ESG, often depends on the organization structure, size, industry dynamics, stakeholder expectations, etc. Good.Lab’s approach to activating an ESG program takes into account progress made to date, so companies can identify a leader early on and areas of opportunity for quick wins. The latest trends and research in ESG regulations suggest that if CFOs lead on ESG the result can be more impactful.

3. Design your first ESG program

After understanding the landscape and risk profile of the organization, designing an effective ESG program is the third step and an area where Good.Lab helps companies to move the needle on impact. This process starts with ESG issues prioritization and benchmarking through materiality, risk and progress assessments, baselining current performance to set realistic, yet achievable ESG targets, and ultimately a roadmap for performance improvement.

4. Measure and monitor your ESG performance

Continuous monitoring and measurement form the backbone of a successful ESG programs. Your performance data should be monitored and analyzed for valuable insights that can be used for continuous improvement. In this stage you’ll want to establish a system for mapping and managing your data and reporting it. Good.Lab’s approach to ESG includes developing an ESG scorecard for visibility into ongoing performance metrics.

5. Assess your ESG and climate risk assessment

A good understanding of ESG risks and opportunities helps businesses to design holistic ESG strategies. Assessing these risks can help businesses identify and address potential issues before they become costly or damaging. While risks/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 paying close attention to diversity, equity, and inclusion initiatives, and in the realm of governance, business ethics and transparency as ever have an essential position for companies to protect themselves from reputational and legal threats.

6. Report and communicate ESG performance

ESG data should be collected on continuous basis and should be aligned with leading frameworks and ratings organizations for companies that have mandated disclosure. An ESG technology platform can simplify the process of reporting ESG data everywhere it needs to go. Good.Lab’s approach to ESG includes helping companies to map out their ESG performance data for reporting into common ESG frameworks and standards.

The ESG software landscape today

The current ESG management 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 provide a comprehensive suite of ESG-related features, and specialized solutions that focus on specific areas of ESG. 

Comprehensive solutions often include features such as ESG strategy development, data tracking and analysis, risk management, compliance management, and reporting capabilities. Specialized solutions, meanwhile, may focus on specific areas such as emissions tracking, energy management, or stakeholder engagement. Comprehensive solutions, like Good.Lab’s ESG Platform, are ideal for mid-market companies that want to quickly build an ESG program and strategy with the guidance of program experts.

Why address ESG now

ESG factors are becoming more pressing as environmental and social issues gain attention in the public sphere. Companies are increasingly recognizing their responsibility to minimize their negative impact on the environment, support the communities in which they operate, and ensure good governance. 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 can benefit from a long-term, sustainable approach to business, helping them to remain competitive even as the economy and industry evolve.

Good.Lab’s ESG Platform helps companies measure and monitor the performance of their ESG initiatives and to compare their performance to industry peers. Good.Lab’s solutions enable companies to identify areas for improvement and develop strategies to improve their ESG performance along with the guidance and support to create and implement their ESG strategy. If you’re ready to get started on ESG, or already have the workings of a program in place, Good.Lab can help wherever you are on your ESG journey. Let’s Talk!

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From ESG program development to ESG target setting, data management and reporting, our team of ESG experts can help you fast-track building a world-class ESG program.