More and more investors are taking an interest in ESG (environmental, social and governance) criteria when choosing to invest in or do business with a company. In this article, we explain why it’s important for companies to meet ESG criteria and embrace sustainability now.
What does ESG mean?
Definition
ESG stands for Environment, Social and Governance. In practical terms, these factors are used as a yardstick to encourage companies to act responsibly. ESG criteria actually assess an organization’s operational performance. In fact, investors, employees and even customers are increasingly considering this aspect before choosing a company to work with.
What are the ESG criteria?
ESG criteria | Environment
These criteria measure the impact, whether direct or indirect, of the company’s activity on the environment. These environmental criteria will be more or less easy to meet, depending on the organization’s sector of activity, but they are so important in the fight against climate change, regardless of the size of the organization that decides to take action. Let’s name just a few examples of plans on which a company could take action: consumption (of electricity or goods), reduction of gas or carbon dioxide emissions (carbon footprint), waste management, impact on biodiversity, etc. Every one of your actions counts in your ecological transition, from managing e-mails to adding a composting system to your offices.
ESG criteria | Social
Social criteria measure the direct or indirect impact of the company’s activities on communities and stakeholders (employees, customers, suppliers, investors). Here, we might think of ethically-oriented rules: respect for the safety of different communities, respect for human rights, diversity and inclusion, and so on. For example, the way in which a raw material is produced or obtained can be a social issue if it is obtained from a country or process where human rights are not respected, as it enters the company’s value chain. Working conditions are at the forefront, and people must be at the heart of the company’s decision-making.
ESG criteria | Governance
From management to administration and control, the ways in which the company is run have an impact. Pay transparency, anti-corruption measures and shareholder relations are all considered governance-related criteria. Data protection and executive compensation are also included in the governance criteria.
Why integrate ESG criteria as a company and why is it important, beyond representing a responsible investment?
Research has shown a direct correlation between the integration of sustainability and improved organizational performance. Consequently, integrating ESG and sustainability into an organization’s strategy and operations makes good business sense, regardless of the type of activity.
Improving risk management
Organizations are not only exposed to ESG risks in their own operations, but also in their supply chains. The COVID pandemic is an example of systemic and interconnected problems affecting organizations at all levels.
Increasingly, consumers are saying that sustainability is important to them when choosing a brand, and would even pay more for a green product. Implementing an ESG strategy will therefore become imperative if we are to remain competitive. Lenders are also beginning to examine sustainability risks and the quality of ESG strategies before granting loans, so for operations financing, a clear and achievable strategy will consequently become a management tool.
Integrating ESG risks into the company’s overall risk management enables managers to develop solid long-term strategies for responding to similar situations.
Fostering innovation
Adopting a spirit of sustainability generates innovative solutions. ESG compliance has led to the development of new financial products such as green and sustainable bonds. Reuters found that US$649 billion was invested in ESG funds globally in November 2021, more than double the amount in 2019, before the COVID pandemic.
Increase financial and operating performance
A McKinsey study revealed that 83% of C-suite executives and investment professionals believe that ESG initiatives will contribute more to shareholder value within the next five years. Arabesque and Oxford University carried out research involving over 200 case studies. They found that 90% of these case studies indicated that strong sustainability standards reduce the cost of capital for companies and organizations, and 88% showed that sound ESG practices lead to improved operational performance. Good sustainability practices led to higher share prices in 80% of studies. Enough to attract investors!
Enhancing reputation among stakeholders
A study of the gold mining industry revealed that stakeholders play a pivotal role with operators on issues crucial to the profitable extraction of gold and minerals: land licensing, taxation and the regulatory environment. A 2021 research note from the IBM Institute for Business Value noted that in the USA, public concern for environmental protection has emerged as the second highest political priority. Around two out of three global participants said that environmental issues were very or extremely important to them personally.
Better employee relations
Employees are increasingly interested in their employer’s purpose, mission and vision, and are looking for a work-life balance. Integrating ESG practices has a positive impact on recruitment and retention. In times of labor shortage, it’s important to remember that 90% of employees belong to Generation Z and 83% to Generation Y. Generations that respectively believe that companies should take action to solve social and environmental problems, in addition to mentioning that they are more loyal to a company that supports social causes.
Your ESG strategy can also improve employee engagement, efficiency and productivity. The CEO study conducted by theIBM Institute for Business Value revealed that seven out of ten employees said they would be more likely to stay with an environmentally conscious employer. Implementing a strategy and respecting ESG criteria is therefore becoming a key factor in attracting and retaining talent.
You have every reason to take action to create a new business world. Start right away, before it becomes a shareholder request.
Demers Beaulne aims to be the first firm in Canada to obtain BCorp certification, and is committed to helping companies become agents of positive change in the world.
To find out more, contact Melissa Hazel, CPA, our specialist in this field.
