Environmental, social and governance (ESG) factors offer a way for companies to measure their performance in a wide range of sustainability categories.
At the recent Zip Water UK and Facilities Management (FMJ) roundtable on sustainability, health and wellbeing, a group of senior FMs discussed the impact of ESG on their role moving forward. It was noted that ESG is increasingly informing strategy for FMs, expanding and deepening the role, and creating regular discourse with the executive suite.
Growing interest in ESG from investors, consumers and the board room has increased the pressure on FMs to address the issues it presents. For an acronym used so often, however, there is a lot of uncertainty on its meaning, purpose and value for businesses.
We will examine the role of environmental, social and governance factors - or, as it is more commonly known, ESG - and its importance to companies today.
What is environmental and social governance?
ESG is dominating discussion in the corporate world, as both small businesses and large companies race to meet ESG criteria and guidelines. It's one of those terms that is bandied around with increasing frequency, but what does ESG mean, where did it come from, and why does it matter?
It's more than just a buzzword. ESG, or environmental, social and governance factors, is a framework that aims to quantify sustainability issues, giving companies a way to measure what has previously seemed unmeasurable.
ESG began as a corporate social responsibility initiative launched by the United Nations, meant to encourage companies to adopt sustainable practices. It has since evolved, in combination with the Sustainable Development Goals from 2015, to become an internationally acknowledge metric of sustainability for corporations.
How to report on Environmental, Social and Governance factors
To see the best results of meeting ESG standards, you need to be able to report and measure your progress. Reporting on ESG begins with a good strategy; setting clear targets and efficient collection of ESG data.
ESG reporting is often done through a third-party organisation. It's your company's responsibility to collect the data that shows how you meet ESG criteria, but once it is compiled, a third party can produce a report that highlights your progress, relevant to your industry.
Creating an ESG report document - through a third party or otherwise - is a useful way to communicate your ambitions with shareholders and any other relevant parties.
How is ESG measured?
ESG covers a broad range of topics and industries, making it seem somewhat difficult to pin down and quantify the ESG performance of your business. Of course, some are easier to quantify than others: environmental metrics include reducing carbon emissions.
ESG ratings from a third party organisation will typically use ESG criteria specific to the industry of the company being assessed. That way, a company is compared to their peers using relevant ESG data, rather than a business in a completely unrelated sector.
Why are Environmental, Social and Governance factors important?
ESG has become an influential part of decision-making at many companies. From new hires to investment opportunities, ESG metrics are often applied to evaluate risks. As ESG criteria offers insight into business practices - and if a company is run responsibly - it's a framework that consumers, and more frequently, investors, pay close attention to.
From a purely moral standpoint, and, importantly, from the perspective of younger generations, a company implementing ESG initiatives is one of the 'good guys' of the corporate world; a well-run company with a positive influence on society and the planet. ESG solutions mitigate the impact corporations have on the environment, prevent corruption and protect the people they hold influence over.
The value of ESG
It's in any business's self interest to consider the value of ESG; corporate sustainability using ESG analytics is seen as a way of future-proofing a business, enhancing growth and productivity and attracting top talent, among other benefits.
Though it is seen by most as the moral way to run a business, the value of ESG goes beyond ethical reasoning. From a business perspective, aligning with ESG criteria is becoming increasingly essential in running a successful company.
These are just a few of the benefits of creating an ESG strategy.
ESG strategies have a greater influence on long-term business growth than ever before. Considering ESG factors positively impacts consumer trust and brand reputation, while investors and consumers will often look to ESG information to inform their financial decisions.
An effective social strategy boosts productivity and attracts top talent, having a knock-on effect on business performance, while evaluating corporate governance according to ESG guidelines can also improve business growth.
Future-proofing against regulations
Corporate sustainability might seem like a passing trend to some, or a suggestion that can ultimately be ignored. But many industries are already feeling the impact of increasing legislation introduced to combat climate change, and regulations that influence any of the three ESG factors can be introduced at any time.
By pre-empting these changes in regulations and being ahead of the curve, you are future-proofing the company against the impact of stronger legislation and societal swings. While others may be scrambling to catch up when a sustainability-related piece of legislation is introduced, your company will likely be complying already, showcasing an exemplary example of corporate sustainability and forging ahead on ESG factors.
Attract top talent
According to The Deloitte Global 2022 Gen Z and Millennial Survey, the younger generations place a greater emphasis on ESG factors, and expect businesses to enact "positive change for society, putting people and planet ahead of profits".
To attract and retain the most promising individuals, a business must show they share the same values as the next and future generations. Paying close attention to ESG factors will help prove to young professionals that the business is forward-thinking, sustainable and offers a company culture that they would want to be a part of.
Impact on investor decision-making
A report from Foster Denovo found that 25% of investors considered ESG while investing. With the increasing influence of ESG, this is only likely to rise in future.
As mentioned previously, younger people generally pay closer attention to sustainability issues and ESG factors. A survey from the Saltus Wealth Index found that 80% of 18-24 year-olds and 74% of 25-34 year-olds invest in ESG funds; a startling contrast to the 24% of over 65s.
While the environmental considerations of ESG may take a backseat when it comes to productivity, social and governance come to the forefront. Governance and social improve the way a business is run, making processes more efficient across the board. Considering social criteria in particular can increase productivity; happy employees are productive employees.
Improving corporate governance has the most direct impact on reducing costs, streamlining the business and improving strategy. From executive compensation to business efficiency; sustainable corporate governance is an excellent way to reduce business costs. Corporate social responsibility, and the improvements in productivity it brings, also reduces costs.
Prevent legal interventions
Companies involved in huge legal proceedings can attest to the cost and damage of the process. Examining corporate governance and using ESG criteria to determine your strategy will help your business to avoid any legal interventions.
How to meet ESG factors
Different companies will have different priorities when it comes to ESG issues, and may interpret ESG principles according to their own objectives, and choose to pour most of their focus into one of the three pillars.
In a similar vein, certain industries will focus on the ESG considerations they deem most relevant or pressing; i.e. businesses in the construction industry may concentrate their efforts on environmental issues.
Though meeting ESG factors will vary greatly according to your business needs, these are a few ideas to get the ball rolling.
Plan your ESG strategy
Identify your Company's strengths and weaknesses
To meet ESG criteria, you need to first identify where your company needs to improve. You can acknowledge where your business is already performing well in terms of sustainability, and highlight growth opportunities simultaneously.
The data and information you collect at this stage is vital - it will form the base of any sustainability strategy you implement moving forward.
Setting clear targets is the start of a successful sustainability strategy. Using a combination of research methods - including a sneak peek at competitors' activities and collecting data on your own business practices - you can establish your company's ESG targets.
Agree a strategy and budget
Once targets have been set, you will need to agree a realistic budget to meet them. Investing without strategy is an exercise in futility, but equally, strategy without investment is a challenge that is near-impossible to overcome.
An initial investment is instrumental in enacting an effective strategy: research and sufficient change requires a budget. Setting out a clear strategy using the targets your business has determined is the best way to calculate a budget: identifying everything from environmental risks to an office refurb and creating an estimate will give you an idea of the potential costs.
Sustainable investing is a cost that a company will recoup later; with the boost to productivity and other financial benefits of ESG, this initial investment will soon be dwarfed by the long-term gains of your business.
Measure and record progress
As you go about implementing your strategies to tackle climate change, overhaul corporate governance and consider corporate social responsibility, you will need to measure and record your progress.
This can help you adjust strategies, highlight growth and progress, and share your business' ESG information with the relevant parties. Once you have achieved your initial goals, you can go back to step 1 and begin the cycle again.
Meeting environmental criteria
Of the three ESG factors, environmental impacts company strategy in many sectors the most. Environmental issues are easy to identify, and it is one of the easiest ESG metrics to measure; it's unsurprising, then, that environmental criteria, which covers such a wide variety of topics, is the most discussed.
Implementing a strategy to tackle climate change and carbon emissions is relatively straightforward, and will almost entirely depend on the specific challenges faced by the companies and industries involved.
These are just a few general considerations of companies aiming to meet environmental criteria.
Net zero targets
Just as ESG is on the tip of tongues in board rooms, so is Net Zero. Environmental, social and governance factors sit alongside initiatives like Net Zero in corporate strategy. Most companies are looking at ways to become a more eco-friendly business and meet Net Zero targets as part of a wider ESG strategy.
Identifying environmental risks for your company, its use of natural resources and potential methods to reduce carbon emissions are essential in the fight against climate change. It can be as small as reducing the use of plastic bottles in the workplace, or replacing delivery vehicles with EVs - and, as is a recurring theme, meeting Net Zero targets will look different for every business.
Learning from peers
The road to sustainability is a journey, and some are a little further along than others. Your company may be at the start of its own path, or an industry leader. Wherever you are in your sustainability journey, there are sure to be some aspects that your competitors and peers are doing better, and can be learned from.
Paying close attention to thought leaders and industry experts - whether it's through scouring the research material provided by the Strategic Management Journal or your own observations - is vital in developing an effective environmental strategy.
Meeting social criteria
Corporate social responsibility is the pillar that, as you may have guessed, concerns any parts of a business that deals with people. It covers everything from human rights to health and safety.
There are several considerations to make that concern the social aspect of ESG; these are just a handful.
Employees are the backbone of any company - and their wellbeing is paramount to any business's success.
This is a topic in and of itself that can form the basis of in-depth discussions. Understanding what affects employee wellbeing, and what you can do to improve it, is a tricky but worthwhile endeavour. Mental health and physical health are both important considerations, and wellbeing can be affected by everything from regular breaks to office ambience.
Upholding human rights is as important for corporations now as it was 20 years ago. Ensuring the country is complying with human rights - in both the UK and internationally, to prevent outsourcing work to countries with a looser definition of the term - is vital.
What defines human rights is subject to change, so it's essential to keep up to date with changes to legislation.
Social sustainability covers all people that interact with your company - you need to consider your employees, but also your consumers.
Political contributions fall under ESG criteria - with the aim of increasing transparency and managing the influence of corporations over policy.
Reporting on these contributions helps prevent underhanded hypocrisy from corporations: if you're openly making bold statements of the company's ambition to fight inequality and climate change, but support and contribute to a party with harmful policies, the company is not sustainable. Your business's political contributions should align with company values.
Meeting governance criteria
Corporate governance; how is the company run, who makes up the leadership team, business investments and how external shareholders are treated. This is essentially the financial side of sustainability, and concerns everything from executive pay to shareholder rights.
While environment may jump to mind first, governance has an equally important influence on a company's sustainability. Governance issues rarely draw attention until something goes drastically wrong; errors in this side of ESG have the potential to topple businesses.
As part of meeting governance criteria and business ethics, companies need to consider their approach to shareholder rights. Besides ownership, dividends and the right to sue for wrongful acts, shareholders have the right to vote on important issues. Companies should pay close attention to shareholder rights and their input regarding ESG.
Linking executive pay to ESG performance is a way of creating accountability for executive management. It works to drive down the carbon emissions of a company and improves overall sustainability credentials, as the figures with the most influence on the business become extra motivated to hit targets.
Who makes up the executive suite should be analysed according to ESG metrics. If one demographic is overwhelmingly represented, you should work to change this, providing better, more balanced representation in the board room.
Socially responsible investing
Sustainable investing is an important part of meeting ESG criteria; ensuring your company is considering more than just the financial side of investments is a governance sustainability factor.
Environmental, Social and Governance factors: a summary
Environmental, social and governance factors are here to stay - with an influence that grows every year, they are becoming an important part of company - and by association, FMs - strategy. Though environmental factors often receive the most publicity and focus when it comes to ESG, social and governance issues demand an equal amount of attention.
It is a monumental task for FMs and businesses to meet ESG criteria, but it is one worth undertaking. In addition to being beneficial for businesses individually, meeting ESG as a collective is incredibly significant for the planet as a whole.
ESG factors were just one of the topics of discussion at our recent FMJ roundtable. To discover more insights from top FMs on the current challenges in the UK, watch the Zip Water UK and Facilities Management Journal roundtable.