Sustainability and ESG (Environmental, Social, Governance) are not the same, even though the terms are often substituted. While the United Nations coined the term “sustainable development” in 1987, its 2006 Principles for Responsible Investment report called for the addition of ESG criteria to the financial evaluation of companies. Since then, ESG has grown as consumers, investors, and regulators are coming to expect data-driven principles and metrics in these areas.
In this article, we dig deeper into the differences between ESG vs. sustainability and the benefits of ESG for companies.
What is the benefit of ESG?
Research shows that a strong ESG proposition can be a competitive advantage that results in higher financial returns. According to global management consulting firm McKinsey, ESG makes fiscal sense and creates value for companies by:
- Increasing revenue by helping companies expand in a current market or grow into new ones.
- Reducing the costs of energy, water and waste by measuring and addressing use.
- Lowering incidences of government intervention (and potentially gaining support).
- Increasing employee productivity and engagement.
- Focusing on capital investments that improve environmental metrics.
The bottom line is that ESG can tie together a company’s purpose, commitment to social and environmental principles, and operating model. Doing so provides a clearer picture for employees, customers, investors and regulators for which companies to work for, do business with, and invest in.
How can ESG make my company more attractive to investors?
From an investment standpoint, an ESG framework may be seen favourably for many reasons:
- Investor analysis can integrate ESG risks and opportunities in addition to traditional financial reporting.
- A company with a good or improving ESG profile may be preferred over other companies in the same sector.
- An organization’s standards and values are visible through its ESG data.
- ESG allows investors to support social and environmental benefits in tandem with financial returns.
- ESG principles align with “impact investing” – investments with intentionally measurable environmental or social returns.
By measuring ESG principles, a company will also be in a better position to react to changes in environmental, social and regulatory trends that investors are watching.
Is ESG here to stay?
As mathematician Karl Pearson said, “That which is measured and reported improves exponentially.”
Major companies such as Microsoft, Best Buy, Inuit and Salesforce being evaluated on their ESG ratings signal this is not a trend. In the energy space, companies such as Diamondback Energy, EOG Resources Inc., and Valero Energy Corporation are being rated for a low ESG risk; this ESG visibility makes them more attractive to investors.
Global accounting firm Deloitte suggests that we still haven’t tapped the full potential of EGR by investors, investment management firms, and regulators. They predict that by 2025, ESG-mandated assets will make up half of all professionally managed investments in the US. At this time, ESG is definitely here to stay.
How does a company transition from sustainability to ESG?
Transitioning to ESG is an ambitious initiative within a company involving cross-functional stakeholders. The first step is often ensuring the company is clear on its purpose so that ESG initiatives align with helping deliver on that purpose.
Laying the groundwork for an ESG strategy may include the following steps:
- Audit: identifying what’s important to stakeholders such as employees, investors, and regulators
- Benchmarking: creating the context for ESG goals relative to competitors and the industry
- Baseline: establishing where the business is at now, identifying gaps/areas of opportunity
- Planning: setting specific objectives and goals
- Measurement: creating a verifiable measurement plan (usually qualitative and quantitative)
With the groundwork in place, a company will have the information needed to create an ESG roadmap. The roadmap lays out who is responsible, key activities, timelines for achieving goals, metrics, and reporting methodology. A communication plan (internal & external) should also accompany an ESG framework.
Addressing Environmental, Social, and Governance planning is an evolution from a “doing the right thing” social and environmental ethos of sustainability to the specific outcomes of ESG. If your company is implementing ESG, talk to us about how we can support with data-driven metrics and reporting. We also work with customers looking to innovate through performance improvement via controlled equipment tests. Every step towards becoming a more sustainable business is of value, and part of our mission is to help our customers drive their ESG goals.